A riddle, wrapped in a mystery, inside an enigma.
They weathered three putrid macro-economic headlines, a horrendous weekly jobless claims number which included a 5-handle for the first time in nine months, a Philly Fed factory index number that plunged — “unexpectedly” — to the lowest low in over a year and a middling Leading Indicator report from The Conference Board which included the second consecutive decline in the ratio between the Coincident and Lagging indicators.
Yet, despite these headlines spot Nymex gas was trading 2.2% higher on the session five minutes before the EIA report. After the EIA reported what only can be described as a very disappointing (read bullish) storage injection for last week the market surged another 2.6%.
Thus in the five minutes following the report the table appeared set, at least to us here at , for a nice little short squeeze. For example, in between July 15th and August 02nd the contract for September delivery rallied (trough to peak) 17% on average daily volume of 81,583. The contract then dropped 16% heading into yesterday on average volume of 122,174 contracts a day.
However, a funny thing happened on the way to that short squeeze. Once again the market rallied to the doorstep of the 100-day moving average, ?4.40, and failed. It then plummeted 5.3% to 4.141, i.e., 1 tick from the life-of-contract low!
As such, the market remains entrenched in a steep bearish channel… it has never looked more bearish. This then begs the question, why are we not seeing any knock-on weakness in the cross-seasonal Oct/Nov spread… why is the October gaining on the November?
The question is even more perplexing given that the winter strip (Nov’10 to Mar’11) continues to weaken relative to next summer (Apr’11 to Oct’11). It is fair question that one of our longstanding clients provided us with a solid theory. In light of the current string of very low injections, storage balances will not come anywhere near where we were a year ago in September… when there were legitimate concerns that storage capacity would max out before the heating season ramped up in November.
In other words, there is going to be considerable excess storage capacity this time around. Therefore, there will be lots of room to inject through October to make up for the gas we are not injecting today. That, in turn, is putting greater pressure on the November, hence the contract’s weakness relative to the nearer term October contract.
Seems reasonable to .
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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.