Natural gas bears roared back to life Monday and put to rest any doubt about who is in charge of the market. It took less than an hour for these sellers to rescind Friday’s 24-cent advance, but that was not enough. By the time the dust had settled and the last trade tabulated, the numbers for Monday’s trading session were impressive. With its $6.762 settle, the December contract had fallen 35.3 cents from Friday’s close and down nearly $2.80 from its late October peak.

“It looks like some of the run-ups from last week, especially heating oil, are starting to pull back some,” noted a Washington, DC-based broker pointing to the December heating oil contract, which finished the session at $1.4449/gal, down 3.77 cents on the day. “If that had been a prop up to some of the action in natural gas last week, that is gone now. In addition, natural gas futures are still way over the cash prices from everything I have heard.”

The broker noted that this month appears to be different from the past few contract expirations. “Over the last couple of months, the prompt month’s price has also been way over the cash market price heading towards expiration,” he said. “However, the convergence over these periods has been really more of the cash price coming up to meet the futures price. The question is how will it play out this week when December expires.

“It appears now that perhaps futures for the first time is selling down to move a little more aggressively towards the cash price, making it a reverse of what we have seen recently.” The broker added that with two days left for the December contract, anything can happen.

The broker said the markets should converge towards expiry because the big players, or the ones with storage, could simply do the arbitrage — make or take delivery — depending on what way the market is going. “They have the space to do it and can make the arbitrage profit on it,” he said. “That is why the cash and the futures need to come to some range of convergence. Granted, it might be a couple of days after expiry as all of the deals are worked out. In theory, that is how it should work.”

However, Tom Saal of Commercial Brokerage Corp. has a slightly different view of convergence — especially at the beginning of the winter heating season. “Last month the November contract dropped from $8.40 to a $7.626 on expiration day in an effort to converge with cash prices. Cash prices moved up [during bidweek] last month, but quickly fell off when the cold weather forecasts failed to materialize.”

But if any month can buck the convergence trend, December is it, continues Saal. “With so much gas in the ground, we may not see a textbook case of cash-futures convergence this month….The arbitrage opportunity of buying gas and selling futures with the intention of storing the gas for a month or more may not be a viable option with the relatively limited storage space that exists right now.”

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