Speaking anecdotally, we think it is reasonable to assume that this will wind up being one of the hottest summers on record. And, by “record” we mean one of the hottest of the last 100 years or so in which man has kept (somewhat) reliable records. As far as temperatures go in the first 4,499,999,900 years of the Earth’s estimated existence, it’s anyone’s guess… just ask those peer reviewed boys in East Anglia.
Of course the spike in temperatures this summer, just like the plunge in temperatures last winter, has played havoc in the natural gas market. And, by “havoc” we mean for anyone who has tried buying gas based on the bullish weather only to then watch their money evaporate right in front of their eyes.
Buying gas seems reasonable, weather demand is terrific… and injections through stage 2 (of 3) of this refill season have been exceptionally low.
Furthermore, the contango (or discount) on the cross-seasonal Nymex timespread between the October and November contracts has been deviating from the historical path.
That is to say, at this point in the season, as supplies of gas build, the discount on the October contract (the last contract of the summer refill season) tends to weaken relative to the November (the first contract of the winter demand season). This is illustrated in Chart 1 in today’s issue of : as supply rises (out along the x-axis) the discount (down along the y-axis) on the near-term contract rises relative to the second-month.
However, as illustrated in Chart 2, this season the bias in the spread has disconnected from the mean, i.e., as supplies have been building this summer, the discount has been narrowing or moving from the bottom left to the upper right.
Intuitively, the signal the market is thus sending is that concern regarding the future availability of gas is rising. For us bears in the crowd, this should be a concern. After all, spot Nymex is as weak as weak can be… that’s bearish.
On the other hand, expectations regarding supply for next winter (narrowing between the October and November) are in question… and that is certainly not bearish!
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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.