As highlighted in reports passim, the summer Natural Gas strip (Apr’10 to Oct’10) is trading at a significant premium to the nearby winter strip (Nov’09 to Mar’10). For this point in the season that is odd. We could expect this contango in October, when the first leg on the winter strip approaches expiry, but to see this behavior so early in the year is, to quote everybody’s favorite Vulcan, highly illogical.
The first two weeks of March this year have seen an average ratio (Winter/Summer) of 0.952 while the 03-08 timestep averaged 1.176. Such a stark difference is far beyond statistical anomaly. Last year saw the spread widen 2.3% over the month of March, meaning the winter strip gained strength relative to summer.
Can we expect a similar recovery this year? The technical indicators point to no. In today’s issue of The Schork Reportwe graph the Winter/Summer ratio along with the Relative Strength Index (RSI). The RSI is interesting because it tests the recursive strength of the position against itself, which is useful when a contract detaches from normal relationships and patterns, as we’re seeing this year.
Another useful measure is the Hilbert indicator, brought to prominence by John Ehlers in his book “Rocket Science for Traders”,which attempts to map the cyclical time between peaks and troughs. If we consider the 25th April low of 0.936 as a trough, the Hilbert indicator for that date is 17 days, meaning the contract was expected to peak on May 14th and fall thereafter.