Aside from last year’s commodity bubble implosion, this is the only time in the last twelve winters that the March was marked at a discount to the April. Therefore, at this moment in time, traders on the NYMEX are showing no concern for the industry’s ability to supply gas to the market this heating season.
Per the latest weekly updates from the DOE, refinery throughput, i.e. demand for crude oil, is virtually nonexistent. Crude oil runs over the last four reports averaged 14.11 MMbbl/d, approximately 8% below seasonal norms.
Refinery capacity utilization rates averaged below 80% over the last four weeks or more than 9 percentage points below the seasonal range. Furthermore, the consensus amongst analyst’s conference calls in the wake of (dismal) 3Q earnings reports, suggest that capacity is going to be kept low through the remainder of this year and into the start of next year; case in point, the rash of recently announced (indefinite and permanent) refinery shut-ins.
Bottom line, demand in the U.S. for oil is weak now and into the nearby future. As a result, the contango in the NYMEX term structure is re-steepening (see graph in today’s issue of The Schork Report). As of the end of November, the average gradient in the 24-month forward curve finished at a four-month high, 0.58%. Therefore, traders are back to discounting nearby supply of crude oil… into what is historically a strong period of demand.
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.