Last Thursday the EIA reported that working gas in underground storage increased by 69 Bcf or 1.9% to a record 3.66 Tcf for the week ended October 02nd. The surplus to the previous record increased to 113 Bcf or 3.2%. Bottom line, a 69 Bcf injection at this point in the game was huge, i.e. 1 Bcf (1.4%) below the average injection. Nevertheless, the NYMEX rallied in the wake of the report’s release… although, we have been coming off ever since.
In light of the recent mass of arctic air the enveloped key market areas in the Midwest and Northeast, it behooves us to take a brief look at history. In thirteen of the last nineteen heating seasons, the winter high in the NYMEX Henry Hub contract was posted on-or-before the winter solstice (December 21st/22nd).
In other words, in two out of every three heating seasons the high on the NYMEX was put in one full month before the coldest period of the season, the fourth week following the solstice.
Furthermore, as we can see in the charts and graphs in today’s issue of The Schork Report, the winter’s high has been posted in the month of October five times, November five times and on or before the solstice three times in the month of December.
Heck, even that brutal stretch of cold from three winters ago – a stretch which spurred a record sequence of underground storage deliveries in between January 19th and February 23rd, 2007 and which also generated a near record 8 straight triple-digit deliveries, from Jan 19th to Mar 09th 2007 – even that real demand at the height of winter could not push prices past the high established at 9.050 on November 30th, 2006 in the Jan’07 contract.
We tend to see the highest price for consumption commodities, especially natural gas and gasoline, in the run-up to the season. This is because of all of the fear and uncertainty regarding the market’s ability to offset looming, unknown demand, has to get priced into the front end of the curve.
With that said… are we currently in the midst of this year’s pre-season rally? Of course we are. Extant supply congestion notwithstanding, NYMEX gas has exploded higher since the Labor Day holiday back at the beginning of September; from a low of 3.630 on September 08th (November contract) to the recent 5.120 high on October 06th (+41%).
However, apropos that October 06th peak, bulls failed to take out the 5.133 high from August 03rd. The market has been moving lower ever since. Furthermore, new length that was established last week in between 4.811 and 4.630 in the front-month contract has collapsed.
Thus, for the first time since August the bulls look vulnerable.
More to the point, we are now on the cusp of the heating season, a season that is getting off to a great start, yet the NYMEX Henry Hub forward curve is as steep as ever. For instance, on September 08th, November Henry Hub futures traded at a 16% discount to the December futures. Last night, the November contract closed at a 17.2% discount.
The market has rallied, but the contango increased. That is not the sign of a market that is concerned regarding the future availability of supply to meet seasonal gas-furnace demand.
The NYMEX February 2010 and March 2010 contracts settled last night at 5.744 and 5.706, respectively. Therefore, if that recent 5.120 print in the November is going to stand as the high spot print for this heating season, then the back of the winter curve has to obviously collapse. That is a tall order, but it is by no means, impossible.
Anyway, regardless of which contract month we see this winter’s high in, history suggests we will see that high before December 21st… if we have not seen it already.
Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.