Energy prices were weak yesterday - Natural gas gave up most of this week’s gains despite the EIA figures jibing with analyst expectations. Meanwhile a strong dollar helped crude closed lower for the first time in 11 sessions and the products followed suit. All told the markets were quiet in anticipation of today’s nonfarm payrolls number, with analysts betting the unemployment rate will hold steady at 10%...
Yesterday the EIA reported that working natural gas in underground storage in the U.S. decreased by 4.7% to 3.123 Tcf for the week ended January 01st. It was another large delivery from a seasonal perspective. Gas fired space heating demand through the New Year’s holiday week was mixed. In the East, demand (heating degree days) in New York City was 4% below normal, but in Chicago demand was 11½% above normal. Whereas temperatures in New York City averaged a balmy 36.5°F on New Year’s Day, temperatures in Chicago averaged 10.5°F. At the same time Xmas load from the Grid flickered out. Nevertheless, last week’s draw was twice the five-year average.
Volatility has returned.
There are a little more than 11 weeks or approximately 60 trading days remaining until the expiration of the NYMEX April contract (the first contract of this year’s refill season). Last night 60-day historical volatility, 49.9%, crossed the long-term mean, 48.9%. Furthermore, a downward trend in implied volatility has reversed over the last week, 52.8% as of last night.
As we illustrated in today’s issue of The Schork Report, implied volatility (the market’s guess) and historical vol are now both above the long term mean. As such, options traders are back to pricing in risk in the April contract… for good reason.
Molecules are currently being withdrawn from underground storage at an unprecedented rate and we are just now entering what is historically the coldest part of the heating season. Therefore, the mean reverting nature of vol notwithstanding, there is no telling how long it will take for vol to revert lower; assuming it reverts at all, i.e. the trend in both implied and historical vols is up and time is running out.
The Producing Area is bleeding molecules. Deliveries are averaging a blistering 6.2 Bcf/d. That is more than 3× last year’s pace and 1.5× the average from 2004 to 2008. Given this week’s strong implied furnace demand in both market and producing areas, the table is set for a huge delivery for next Thursday’s report.
Deliveries in the West have also been strong at 2.6 Bcf/d. That is 50% above last year’s pace and 37% above the average for 2004 to 2008. Be that as it may supplies began 2010 at a record high, 434 Bcf. On the other hand, despite one of the coldest starts to the winter that we can recall, deliveries in the East are mixed at 8.5 Bcf/d. Last year U.S. economic activity was virtually nonexistent (e.g. steel mill capacity was around 33% and Big Auto was becoming no more), yet deliveries are 17% lower this season… they are however 17% above the 2004 to 2008 pace.
Bottom line, total deliveries are averaging 20.4 Bcf/d so far this season. That is 50% above a year ago and 73% above the average of 2004 to 2008. Next week we could see a delivery in excess of 250 Bcf. That will pull current storage from 3.12 Tcf to below 2.9 Tcf. Beyond that, assuming we do not see any freeze offs in the Gulf this weekend, temperatures in Chicago are expected to moderate.
Should the current pace of deliveries then revert lower to the higher end of the long-dated range, analysts at analyze that we could be looking at an additional 1.23 Tcf of gas coming out of the ground. That would still leave end-of-winter storage at 1.65 Tcf or within 3% of the 2006 record of 1.695 Tcf.
Granted, there are a lot of assumptions here, but then again, perhaps this is why the NYMEX keeps stalling above $6.
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.