Back in the June 16th Schork Reportwe talked about the peculiar action transpiring in the Nymex Henry Hub back spreads. For instance, in between May 06th and June 15th, the backwardation for the key cross-seasonal March 2011/April 2011 spread spiked by 204%. Recall, this was the purported trade that drove a $9 billion hedge fund (Amaranth) into extinction.
We thought this price path a bit strange in light of the fact supplies were (and still are) getting stuffed into the ground at a comfortable pace. For instance, per the latest monthly numbers from the EIA, at the start of the refill season in April, the net amount of gas injected and added (underground and LNG storage) than withdrawn, was the largest differential since records began in 1973.
Once these seasonal spreads lock onto a trend, they stay on trend. Exceptions to this observation are typically related to either hurricanes or Wall Street skullduggery (see Amaranth). What caught our attention a couple of weeks ago was the decoupling of these spreads from downward trends. In a relatively short amount of time the back spreads suddenly acquired the feature of one of Al Gore’s dubious hockey stick patterns.
As we said in June, we had not seen such action this early in the season in these spreads since MotherRock and Amaranth got into their pi**ing match in summer 2006. Thus, we wanted to know, was history about to repeat, i.e. were these spread going to mean revert, or… as every degenerate gambler will tell you… was this time different?
Bottom line, you should not listen to degenerates. Despite severe (and sometimes) record demand for cooling Btus over the last three weeks, the contango in the Oct/Nov has increased by 75% and the backwardation in the Mar/Apr has been cut by 59%, i.e. these spread jumped up, and then down.
As analyzed in today’s issue of The Schork Report, this time was not different… and that is not bullish.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.