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Prompt month volatility on the NYMEX calmed down last week compared to the fireworks during the preceding couple of weeks. The January 2019 contract finished the week down 12.4 cents in total. The largest single day move was a 27.3 cent drop on Monday, on the heels of warming weather forecasts. The largest increase of the week, a 16.1 cent jump, came Friday which isn't too surprising as traders don’t like entering weekends overly exposed to changes in forecasts.
More interesting than the prompt month trading was what happened in all other months. The February 2019 contract finished down 4.1 cents while all other months, from March 2019 through December 2019, gained at least 10 cents. In aggregate, the 12 month strip (currently the 12 calendar months in 2019) gained 7.7 cents.
Considering the trading levels at the start of the week, it is not surprising that the March and beyond months gained while January and February lost. Specifically looking at January and March 2019, they started the week nearly 60 cents apart (Jan @ $4.612 & Mar @ $4.014). The 60 cent spread between those two months is unusual and most analysts would expect some convergence to more normal spreads. By weeks end, the spread had dwindled to 33.3 cents (Jan @ $4.488 & Mar @ $4.155).
How would we define normal for the January to March spread? Perhaps looking forward a year to 2020 is a good indication. January 2020 is currently trading at $3.213, 27.5 cents higher than March 2020 which is at $2.938. With this past weeks trading, it appears the first quarter of 2019 is now trading at more normal spreads from one another.
Over the coming months we will have to closely watch the March to April spread, currently more than $1.15 for 2019 but only $0.40 for 2020. While not guaranteed, we would expect at some point that either the winter prices would drop back towards summer prices or summer prices would begin to increase towards winter levels.
Daily production levels and weekly storage numbers will help drive the next couple months in determining whether the bulls or the bears ultimately take control of the market. For the immediate future, above average temperatures are dominating current December forecasts.
The above comments regarding the NYMEX futures market are for illustration purposes only and the sole opinion of the author and not IGS Energy, its officers or its employees. Neither the author nor IGS Energy shall be liable for any information contained herein. This communication is no way intended to provide guidance or recommendations as to the value of or advisability of trading in any contract of sale of a commodity for future delivery, security futures product, or swap.
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