natural gas direction
- Thread starter pumpNdump
- Start date
by the way - food for thought and discussion, at 4.40 versus 6.40 for a mere 20 day wait, producers should have no incentive to be running full tilt until Nov delivery. Thats nearly a 30% premium for a 20 day wait!!
So one would think you should see massive selling pressure from producers on the futures side, and declining production and perhaps less than expected nat gas storage in the next 2 weeks... Intuitively too, you would think actual consumers would buy at spot with the margin this high, and take the risk that Nov gas on delivery will be higher even than 6.40. No actual consumer of gas would buy the futures contract today. Think about it. At 4.40 henry hub, you could buy now and still afford probably 8.00 by delivery date and do better buying spot.
More reason I think this is all non-end-user trader volatility not driven by fundamentals.
makes sense when the spot market is at 4.40, even after chesapeake (amongst others) is shutting in 100mcf/day. Which leads me to believe we're not on our way to $10 quite yet. but that doesn't concern me right now - one month at a time. Amongst increased electric production, a harsh winter could send us to $12, I have no doubt.
So one would think you should see massive selling pressure from producers on the futures side, and declining production and perhaps less than expected nat gas storage in the next 2 weeks... Intuitively too, you would think actual consumers would buy at spot with the margin this high, and take the risk that Nov gas on delivery will be higher even than 6.40. No actual consumer of gas would buy the futures contract today. Think about it. At 4.40 henry hub, you could buy now and still afford probably 8.00 by delivery date and do better buying spot.
More reason I think this is all non-end-user trader volatility not driven by fundamentals.
makes sense when the spot market is at 4.40, even after chesapeake (amongst others) is shutting in 100mcf/day. Which leads me to believe we're not on our way to $10 quite yet. but that doesn't concern me right now - one month at a time. Amongst increased electric production, a harsh winter could send us to $12, I have no doubt.
correct. hub spot prices -- but as far as futures are concerned, hub prices are what matters here. wellhead prices should be at a discount even to spot hub prices, as pipeline costs amass on the way to hubs.
interesting article (little bit dated) on hub spot and futures spot correlation. notice past oct and nov months, and also notice the diamonds are avg spot for the whole month, whereas futures are at closing (so of course spots should lag behind since you are not comparing spot on settlement to futures on settlement) - but look for a 2.00 margin (or 30% on a percentage basis). not easy to find - and with this data, albeit a little incomplete, the odds are you'll find it here (since trailing #s don't compare to settlement numbers favorably anyway) versus settlement spot to settlement futures.
http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2005/futures/futures.pdf
Again, I think you are confusing "spot hub" prices with "wellhead prices"
In any case why "massive selling pressure" ? It is entirely possible, but what would make you think that ? Is it not possible that the futures market is just pricing in colder weather over the next 20 days which will possibly bring up spot prices? I'm not saying you are right or wrong, I just don't follow our reasoning.
For the record, I'm long from 5.50 and plan to go short on Monday morning for 1 week, the return to the long side before friday close.
Thanks for the link. Nothing new, but this part of your article seems to to the most important to retain :
Findings
⢠The prices for futures contracts for delivery in a given future month can vary greatly over time. Owing to the large price changes, it is evident that even if the futures price correctly anticipates the target spot price periodically, continued price changes inevitably lead to differences from the future realized price.
⢠The differences between futures prices and the corresponding realized spot prices do not necessarily diminish over time. While the prices of some futures contracts performed adequately as predictors of the Henry Hub spot price in the last month of trading, settling within 4 percent of the realized Henry Hub spot price, the prices for these contracts and those for delivery in other months generally failed to perform very well as predictors during the course of trading.
⢠Although prices for futures contracts in any given heating season may exhibit a systematic bias (e.g., consistently underestimating prices for the 2002-2003 heating season), the patterns do not evolve in a predictable way between seasons. This would impede attempts to use futures prices to predict actual heating season prices based on previous patterns in the data.
... moral of the story ... don't expect spot & futures prices to come together, even at expiry.
Well it was food for thought at least. We'll see what actually happens.
In the end, we're probably taking the same positions. I anticipate trading a short range (covering near 6.00) (a sure bet to lock in to some more profits) on half my position and taking a wait and see on the other half. I am anticipating some runup in hub spots as we get closer to expiration. Depending on how this runup progresses, this will provide me with a cue on how to roll with it. So far I was very happy to see Friday's selloff in spot - would've loved the Friday futures selloff to hold, but I used it as another selling opportunity. I was short ng from 6.32 and took some profits at 6.16. After I covered, I put in a sell order at the higher level just in case yesterday repeated itself. Left the computer, and not to long I come back and wonder why I see no order sitting.
Pretty amazing.
The graphs in that article don't say there's little correlation. And of course there are no guarantees in life, but the probability is high of convergence.