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Jurassic


Total Posts: 208
Joined: Mar 2018
 
Posted: 2018-11-15 11:29
Rocky day for natural gas yesterday which leads to this article https://www.cnbc.com/2018/11/14/mark-fisher-says-the-worst-is-over-in-crude-oil-and-its-time-to-buy.html. .

I was wondering whether anyone could enlighten me as to how the oil vs gas trade is set up? Is it looking take advantage of mean reversion or differences in roll downs?


goldorak


Total Posts: 1059
Joined: Nov 2004
 
Posted: 2018-11-15 12:10
Nat Gas... you remind me it all happened more than 10 years ago.

For the culture of the youngest hanging around here.
Amaranth - Brian Hunter

If you are not living on the edge you are taking up too much space.

Azx


Total Posts: 39
Joined: Sep 2009
 
Posted: 2018-11-15 15:55
I would guess that the trade has been based on positive momentum for crude oil and steep contango for natural gas.

Yesterdays situation in NG strikes me as very similar to the VX spike in February. Two leveraged ETNs with about $3B in net exposure would be a lot of contracts that had to be bought to rebalance within a day.

ronin


Total Posts: 443
Joined: May 2006
 
Posted: 2018-11-19 12:27
There is no oil vs gas trade. There isn't even a good gas vs gas trade.

Energy spreads that people trade tend to be vertical rather than horizontal. Fuel oil to Brent, unleaded gasoline to WTI, power to gas, power to coal etc.

The only meaningful horizontal is spreads between various crude oils. But the reason why that works is because there is one benchmark crude, and everything else is priced in reference to the benchmark.

"There is a SIX am?" -- Arthur

Jurassic


Total Posts: 208
Joined: Mar 2018
 
Posted: 2018-11-19 19:27
[deleted]

Jurassic


Total Posts: 208
Joined: Mar 2018
 
Posted: 2018-11-19 19:27
https://www.themacrotourist.com/posts/2018/11/13/chipper/

@ronin so you are suggesting this oil vs gas is by chance

TonyC
Nuclear Energy Trader

Total Posts: 1295
Joined: May 2004
 
Posted: 2018-11-20 09:10
one is occasionally faced with a choice twixt laying off a 6oil spark vs a gas spark whilst hedging off forward production across your generation fleet ... (i.e. when the spark on one's 6oil fired plant is the same as the spark on one's gas turbine)

say you put on the 6 oil spark, (buy spot 6 oil, put it in a tank, and sell Forward electricity)

you're hoping that spot 6 oil inverts relative to forward 6 oil and you'll make money on your tank, and/or you're hoping that gas will fall relative to 6 oil and you unwind your six oil spark and replace it with a natty gas spark.

you can win two ways, (i.e. monatize your fuel switch option) and one of those ways is the forward six oil versus forward natty gas spread.

but hedge funds or speculators typically don't do oil vs natty, 'cuz they typically don't own a generation fleet, or tankage.

flaneur/boulevardier/remittance man/energy trader

ronin


Total Posts: 443
Joined: May 2006
 
Posted: 2018-11-20 15:00
@jurassic,

What @tonyc said. Especially if you can work out the twix reference.

As for your blog post, I wouldn't get overexcited by stuff like that.

I did have a quick look at the numbers, and they don't tell the same story as the blog post. Something happened with natgas, and prices and volumes spiked on the 13th/14th, both futures and options. But WTI didn't do anything extraordinary, either in terms of price or volume.


"There is a SIX am?" -- Arthur

EspressoLover


Total Posts: 368
Joined: Jan 2015
 
Posted: 2018-11-20 19:15
The energy market's littered with the corpses of plucky traders who dived headfirst into some historically aberrant spread divergence, only to watch their portfolios wiped out as the spread diverged even further. WTI vs. Brent, diesel vs. gasoline, Henry Hub vs. nat gas basis, gas vs. power, corn vs. ethanol, crude prices vs. energy sector valuations, pretty much anything Enron did ever, etc.

You can't really treat energy spreads as a statistical black box because of the high risk of sudden regime change. If you throw a pairs trade on between MCD and BKC, it's pretty unlikely that Burger King is going to suddenly decide to completely change over to a cloud computing business. Your biggest risk is maybe M&A, but on a single name basis that's a pretty low, easily diversifiable risk.

With energy you have all these relatively close substitutes on top of rigid inelasticities. It's easy for some small shift in supply or demand to all of a sudden invert the economics on some part of the complex. The spread looks stable, stable, stable, then boom there's a violent phase change.

Good questions outrank easy answers. -Paul Samuelson

Jurassic


Total Posts: 208
Joined: Mar 2018
 
Posted: 2018-11-20 20:28
@EspressoLover tres interesting

djfostner


Total Posts: 29
Joined: Oct 2008
 
Posted: 2018-11-20 20:47
It used to be that there were some opportunities in the winters to trade NG vs HO more often as a lead/lag, as there was a fair amount of heating demand, especially in the northeast US that could use them interchangeably and during a supply shortage event (ie much larger than expected draw in NG, or NY Harbor delivery concerns) the fear of not getting delivered on would cause the market to drive the spread to unsustainable levels even further down the curve. But as others have mentioned, and what 10 years trading energy OTC has taught me, is that there aren't many statistical relationships in the energy complex that aren't sensitive in some way to possible drastic change. And there certainly has been seen a fair number of individuals/trading desks/energy firms that have found themselves out of a job, due to their reasoning that there are stable relationships between products in the energy spectrum that shouldn't have been completely thrown out the window when there was a fundamental change in the market.

Intra/inter-contract/product relationships between energy products can change very quickly which makes domain knowledge and experience very important, especially in the illiquid corners of the market. For example, large infrastructure changes (massive additional storage) after Katrina/Rita caused some regional NG basis responses to hurricanes invert. Small market features like RINs availability hitting the blend wall ended some careers and even some companies in the crack/refinery space while also becoming the most significant factor in the ULSD --> HO:G relationship. Also laws like recent maritime sulfur limiting rules starting in 2020 has caused repricing of entire curves in gasoil/fuel oil products. It is just my opinion, which most certainly can be wrong, but from what I've observed, it's usually best to be the one to spot a reason that should cause a large spread dislocation and ride that rather than to be the guy betting the price extreme it's just an irregularity and the market will hopefully revert.

It's very possible that the NG:CL spread reverts maybe just on the small point that commodities prices tend to mean revert. But as TonyC mentioned, there are limited players in the physical space that would be looking to put this trade on. And if the physical players aren't really trying to lock in the opportunity, chances are there are larger forces at work. Best of luck.

nikol


Total Posts: 676
Joined: Jun 2005
 
Posted: 2018-12-18 12:30
how do you like this?

"Wiped-Out Hedge Fund Manager Confessed His Losses on YouTube"

He is "blaming a "rogue wave" in the natural gas market"

deeds


Total Posts: 425
Joined: Dec 2008
 
Posted: 2018-12-18 13:05

story pulled?

nikol


Total Posts: 676
Joined: Jun 2005
 
Posted: 2018-12-18 23:07
bad me - i have broken the link. it is repaired now.

the entire video is a bit hollywoodish. nickname "1001 sighs and 1 bucket of tears"

EspressoLover


Total Posts: 368
Joined: Jan 2015
 
Posted: 2018-12-19 03:19
Talked to a nat gas trader a few weeks back, and this was his take on it. Take with a grain of salt, as this was one guy over drinks...

As oil prices collapse, a lot of the shale fields become unprofitable and production slows down. However those wells tend to output a lot of nat gas as an ancillary byproduct, and are now a major source of US supply. So in effect, falling oil prices "wag the dog", and raise NG prices through reduced production. While the two products are substitutes on the demand side, they're now complements on the supply side. In regimes where the latter side of the equation is driving the market, we'd actually expect the two to become anti-correlated.

Good questions outrank easy answers. -Paul Samuelson

nikol


Total Posts: 676
Joined: Jun 2005
 
Posted: 2018-12-19 13:56
In terms of electricity production oil and gas are substitutes, yes.

I have a bit different theory: among other things value of dollar depends on volume of oil trade transactions (contracts) concluded in dollars and registered/processed at Wall Street. If that volume is shrinking down (Iran, Russia, Venezuela sign it now in Euros and China supports even futures in Yuan) what Dollar owner should do?

Let's face it, dollar denominated contracts are too expensive for end consumers both, economically and politically. Freedom of trade is just a slogan.

Since military action is excluded now because Russia and China are not the same as Iraq with "chemical WMD" only economic weapon is left. This is what is happening now - dumping of prices to undermine all mutineers and to grab trade flow under dollar umbrella.

Of course, it is just IMHO.

PS.
Here is an outdated (2015) report about global currency flows as seen by SWIFT. Their current report is hidden now (= it is not free). I saw excerpt graph showing fall of Dollar volume in transactions.
Attached File: swift_bi_currency_evolution_infopaper_57128.pdf

nikol


Total Posts: 676
Joined: Jun 2005
 
Posted: 2018-12-19 14:34
This is snapshot of trades in 2011. Notice dominance of EU-China and MidEast-Asia trades. All fight we see now is about getting these flows out from USD umbrella.

Interesting remark under plot about 54% with "internal" and "unknown" source-destination.

Role of Africa is only growing now, because of "green energy" and lithium and cobalt used in batteries.


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