In Monday's , we plotted the return on holding underground inventories of , as measured by the front-month on the Nymex (y axis). In this example, demand is inferred from the trendline running through this scatter plot of the spread and EIA estimated storage (x-axis). When the scatter point lies above the trendline, as is the current case, it is understood that demand for inventory is above normal. This event likely correlates to this incongruous refill-season.
Injections in the first phase of the season averaged 11.9 Bcf/d or 10.9% above the average of the previous nine seasons. As a result, the overall surplus at the end of June was 21½% or 485 Bcf… and that was inclusive of the 8th warmest June in the U.S. on record.
However, injections through the second phase of the season, i.e., the dog days of July and August were around 38% below the 2001-2009 average. A 21½% surplus that existed in June narrowed to 9.6% in August (according to preliminary estimates for July and August) as a result.
The last phase of the season now takes us through the peak hurricane season in September and October. Average injections rebound to 10.6 ±0.5 Bcf/d in September as temperatures cool and then fall to 6.6 ±0.8
Bcf/d in October as utilities top off storage ahead of the winter. In this vein, this phase is getting off to a very strong start, 12.6 Bcf/d through the first two reports.
As we go back to the , we can see that as we move out along the x-axis, i.e. as time goes by through the season and underground stores build, the contango (represented as the difference between the first two contracts on the curve) increases.
In other words, as supplies rise through the refill season, the nearby contract weakens relative to the start of the winter. However, as illustrated, to date, the current Oct/Nov spread (which expires tomorrow) has decoupled from the seasonal script. Whereas the contango exhibits a tendency to widen, this year the contango has converged.
We believe this decoupling is a result of the sub-standard second phase of the season which has now left a considerable amount of available storage to fill this fall… with gas for October delivery. Hence, the bid in the market for spot molecules. In other words, natural gas is weak, but the November market is falling relative to October. As such, short of a disruption to the flow of gas (Mathew being the latest dud for the bulls) the table is set for a nice build through the final phase of the season.
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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.