Can Start Buying Natty Now
- Thread starter Comanche
- Start date
Since this is more about the dynamics than the fundamentals, picking a spread that will work well is difficult. It would seem to me that buying aug or sep agtainst november is your safest bet, and should perform well in a front ended short covering squeeze.
If you want to dial down the risk, I would suggest buying 3 sep calls with a .33 delta and selling 1 sep future against it. As long as we don't stay right here for the next month and a half, you can make $$ on a rally or a fall.
Unlike the volatile NG futures contract, UNG can be traded as low as 100 (or even 50 shares) shares at a time. ( worthwhile only at IB)
In May/Early June it was range bound between 49-52.
I tried to catch the falling Knife at 46.20. After that , last week averaged/sold many times between 41/42/43 & came out positive.
If the heat wave comes down ,I still think 44 is the temporary celing for UNG till real hurricane season kicks in. ( Early /mid August)
If NG breaks down 6.15/6.0 ,we might see UNG go down to 38.8/39.2.
NG Storage is plenty but when compared with CL looks cheap. But if CL comes down say 6-7 $ in the next few weeks(still in uptrend), what will NG do?
I think bigger hands control it. Unlike CL/Brent which is International which then can be hyped in TV , NG unfortunately is local.
Can NG break 6.0 & go rangebound between 5-6? Sounds scary!
In May/Early June it was range bound between 49-52.
I tried to catch the falling Knife at 46.20. After that , last week averaged/sold many times between 41/42/43 & came out positive.
If the heat wave comes down ,I still think 44 is the temporary celing for UNG till real hurricane season kicks in. ( Early /mid August)
If NG breaks down 6.15/6.0 ,we might see UNG go down to 38.8/39.2.
NG Storage is plenty but when compared with CL looks cheap. But if CL comes down say 6-7 $ in the next few weeks(still in uptrend), what will NG do?
I think bigger hands control it. Unlike CL/Brent which is International which then can be hyped in TV , NG unfortunately is local.
Can NG break 6.0 & go rangebound between 5-6? Sounds scary!
Let me preface this post: it explores gas supply/demand fundamentals vs. market participant impact (trading supply/demand fundamentals)... conclusion: its a crapshoot probably best played technically. When trading, its best to realize that supply/demand fundamentals which attempt to concretely define fair value of the underlying (actual gas) versus the supply/demand fundamentals of market participants often do NOT correlate. So if they correlate less than 49% of the time [which most often is the case], is either tradeable with a positive expectancy? (rhetorical question)
Correlations are always changing. Scratching my head at crude's opposite ascent to NG, I've been considering the weak dollar's impact on crude. Crude is the new gold - which makes sense, since crude's function in the energy dependent world economy is easily defineable (whereas gold's relationship and demand dynamics as hybrid currency hedge, hybrid jewelry & manufacturing resource seems more vacuous).
I have a feeling currency moves have a much bigger impact on crude price nowadays than 10 years ago, especially since now in real terms $75 oil from this year is actually 8% cheaper for buyers than last year (1.38euro vs 1.27euro conversion).
since US natty is a local market, I think its generally less (or even -not-) affected by these currency dynamics. But in crude, foreign buyers get $75 crude for $69 in last yr's real terms.
This doesn't take into consideration what big crude players are doing. (market participant dynamics) So its an incomplete theory.
With that said, even a complete wipeout for 3 months of gulf resources from hurricane season (note that 2005 hurricane season was only a 60% cut in gulf production that took less than 3 months to get back to current levels [though which are 6bcf/month less than pre-2005 season levels]) would result in 700bcf of production off the total storage inventory. With that off the top from today's est of ~3600-3700 peak levels by Oct, a look at historic inventories reveals 2800-3100bcf inventories when natty traded at $2-3.
http://www.eia.doe.gov/pub/oil_gas/.../natural_gas_monthly/current/pdf/table_06.pdf
http://tonto.eia.doe.gov/oog/info/ngs/history.html
That said, there is little fundamental supply demand argument that supports natural gas besides local pipe flow dynamics (ie pipe limits in Z6 in record cold). The potential of fuel switching to impact prices is there, but how much of an influence can it have? Even if crude was 20x more expensive on a btu basis, its not as if we have the potential to all switch fuel to NG cars and entirely stop using fuel oil in our power plants and east coast homes. That won't happen because NG supply is generally static and any building progress to infrastructure/fundamental based changes to NG consumption/demand elasticity (ie more NG cars, more NG/oil power plants, and excess LNG import terminals) could be short lived building easily ceased by a series of cold winters potentially eliminating the 'btu arb'.
Thats why I perceive 6:1 crude price:ng price relationship is currently broken and untradeable at least in the short term (in other words, its a trade not able to be leveraged in anything but the most extreme cases).
I see crude in a better bullish case since a large excess to the supply/demand margin in crude flows through one shipping channel in a region where we hear about conflict occuring every day, and possibly intensifying (not to mention producers like nigeria, venezuela's strife, or mexico/indonesia declining production) ... on top of that, a weak currency that -moreso- potentially impacts price than the local NG market.
this argument applies only for this year, until we have a nonstop cold early winter occuring.
... and go figure I'm long here at an avg basis around 7.10 or so. Mostly because 'fundamentals' without consideration of market participants is probably meaningless. Look at AMZN ... 2.88 PEG ratio with analysts upgrading it solely on the merit of 'large # of shorts in the market', further causing more short covering rallies.
So the better question is this... if AMZN can be at nearly 3x fair value on a PEG basis, why can't NG be at 3x fair value on some other extraneous basis (market participants)? [ie fair value could be $5 here... so why not $15 NG with the same 'fundamentals'?]
Correlations are always changing. Scratching my head at crude's opposite ascent to NG, I've been considering the weak dollar's impact on crude. Crude is the new gold - which makes sense, since crude's function in the energy dependent world economy is easily defineable (whereas gold's relationship and demand dynamics as hybrid currency hedge, hybrid jewelry & manufacturing resource seems more vacuous).
I have a feeling currency moves have a much bigger impact on crude price nowadays than 10 years ago, especially since now in real terms $75 oil from this year is actually 8% cheaper for buyers than last year (1.38euro vs 1.27euro conversion).
since US natty is a local market, I think its generally less (or even -not-) affected by these currency dynamics. But in crude, foreign buyers get $75 crude for $69 in last yr's real terms.
This doesn't take into consideration what big crude players are doing. (market participant dynamics) So its an incomplete theory.
With that said, even a complete wipeout for 3 months of gulf resources from hurricane season (note that 2005 hurricane season was only a 60% cut in gulf production that took less than 3 months to get back to current levels [though which are 6bcf/month less than pre-2005 season levels]) would result in 700bcf of production off the total storage inventory. With that off the top from today's est of ~3600-3700 peak levels by Oct, a look at historic inventories reveals 2800-3100bcf inventories when natty traded at $2-3.
http://www.eia.doe.gov/pub/oil_gas/.../natural_gas_monthly/current/pdf/table_06.pdf
http://tonto.eia.doe.gov/oog/info/ngs/history.html
That said, there is little fundamental supply demand argument that supports natural gas besides local pipe flow dynamics (ie pipe limits in Z6 in record cold). The potential of fuel switching to impact prices is there, but how much of an influence can it have? Even if crude was 20x more expensive on a btu basis, its not as if we have the potential to all switch fuel to NG cars and entirely stop using fuel oil in our power plants and east coast homes. That won't happen because NG supply is generally static and any building progress to infrastructure/fundamental based changes to NG consumption/demand elasticity (ie more NG cars, more NG/oil power plants, and excess LNG import terminals) could be short lived building easily ceased by a series of cold winters potentially eliminating the 'btu arb'.
Thats why I perceive 6:1 crude price:ng price relationship is currently broken and untradeable at least in the short term (in other words, its a trade not able to be leveraged in anything but the most extreme cases).
I see crude in a better bullish case since a large excess to the supply/demand margin in crude flows through one shipping channel in a region where we hear about conflict occuring every day, and possibly intensifying (not to mention producers like nigeria, venezuela's strife, or mexico/indonesia declining production) ... on top of that, a weak currency that -moreso- potentially impacts price than the local NG market.
this argument applies only for this year, until we have a nonstop cold early winter occuring.
... and go figure I'm long here at an avg basis around 7.10 or so. Mostly because 'fundamentals' without consideration of market participants is probably meaningless. Look at AMZN ... 2.88 PEG ratio with analysts upgrading it solely on the merit of 'large # of shorts in the market', further causing more short covering rallies.
So the better question is this... if AMZN can be at nearly 3x fair value on a PEG basis, why can't NG be at 3x fair value on some other extraneous basis (market participants)? [ie fair value could be $5 here... so why not $15 NG with the same 'fundamentals'?]
Quote from Comanche:
Go on CNBC and talk out of his ass as usuaul.
And T boone was saying NG was a great buy after the amaranth fiasco. Who knows if he was already long ... and who knows now if he is still net short.
on spreads: i am in the long Oct 07, short Nov 07 spread around .78 average. It appears to have leveled out, performed very well in this descent, and a look at past hurricane seasons reveals excellent performance. Hopefully someone won't buy it up to 2.00 like last yr.