What's driving NG down?

B

bobbymak880

Is it the large specs?
I'm trying to get a handle on the steep drop over the last few days.
Weather is cold.
Seasonality is kind of bullish, is it not?
I'm confused.
 
"Even if temps are colder than expected,
producers increased their net short position by 40.86%
implying ample storage levels for the weeks ahead."

That is from the Schork Report
 
Quote from bone:

"Even if temps are colder than expected,
producers increased their net short position by 40.86%
implying ample storage levels for the weeks ahead."

That is from the Schork Report
More...

Hi professor,

Could you please elaborate on

(1) why did producers increased their net short position?
and on which month contract? Do producers typically short the back end of the curve (i.e. the months that are further out)?

(2) why does that imply the ample storage levels for the weeks ahead?

thank you!
 
Quote from bobbymak880:

Is it the large specs?
I'm trying to get a handle on the steep drop over the last few days.
Weather is cold.
Seasonality is kind of bullish, is it not?
I'm confused.
More...

It is not what the weather is, it is what the weather will be.

It will be warm next week and winter ends in only 6 weeks. If NG supplies haven't been drawn down by now they aren't going to be before winter ends.
 
Producers routinely sell a portion of their forward production into the futures market in order to lock in margin. From my experience, they prefer to sell strips, which are typically the balance of a current calendar year, or a complete strip of 12 months in a forward (Cal 12, Cal 13, etc.). They offset their positions either through physical delivery, or by rolling the futures contract with the front to second calendar spread.
 
Quote from bobbymak880:

Is it the large specs?
I'm trying to get a handle on the steep drop over the last few days.
Weather is cold.
Seasonality is kind of bullish, is it not?
I'm confused.
More...

Its cold now, but 6-10 is looking warm with not much help from weather further out in the big consuming regions. This week's storage should spread out the yoy number and maybe bring us close to par on the 5 yr avg (high 190's at least to drive a dead cat). I'm looking for a little prompt month bounce on Thursday but even high draws have been disappointing so its a dangerous play.

Seasonality is pretty much over the big withdrawal months now (barring some weather anomaly) and I'm hearing that a quick drop off in withdrawals is being priced in heavily. Winter's not over but some smart people believe that the severe cold has passed.

Big guys are unwinding hedges and betting on way lower prices. Chesapeake is betting on prices staying at or under 8 bucks as far out on the curve as 2020. Here's an article on short term hedges I posted previously

http://www.cnbc.com/id/41154326/Chesapeake_Energy_s_Hedging_Strategy_Could_Generate_Billions

Technicals are bearish, and these depressed prices come with a weak dollar. I'm looking at a good strong settle over the 20 day MA around 4.45 before I buy into a short term low being posted.

The Prof can probably elaborate more for you though.
 
Jeb/Jo/Bones/anyone:

There are weather forecasts two to four weeks into the future which, according to Bloomberg news, affects the price of the front month NG. However, are ALL weather forecasts alike?
Today, the National Weather Service said temps would be warmer over the next two weeks.
How is the quality of National Weather Service forecasts
compared with:
- MDA Federal Inc.’s EarthSat Energy Weather in Rockville, Maryland
- Commodity Weather Group LLC in Bethesda, Maryland.
- AccuWeather in State College, Pennsylvania

Would shorting NGH1 now be prudent? or go long?
What would cause one of those HUGE green spikes upward which I've seen on some daily bars?

Thanks,
Bob (new ng trader)
 
If the flat price directional future is a bit much for you in terms of risk, the calendar spread is a reasonable alternative. The spread has quite a bit of delta directional risk these days - in other words, it moves directionally with the flat price future, and this is not always the case.

Nat Gas March Future, 15 minute:

2dm5wyq.png


Nat Gas March - April Calendar Spread, 15 minute:

k0hy74.png
 
Quote from bobbymak880:

Jeb/Jo/Bones/anyone:

There are weather forecasts two to four weeks into the future which, according to Bloomberg news, affects the price of the front month NG. However, are ALL weather forecasts alike?
Today, the National Weather Service said temps would be warmer over the next two weeks.
How is the quality of National Weather Service forecasts
compared with:
- MDA Federal Inc.’s EarthSat Energy Weather in Rockville, Maryland
- Commodity Weather Group LLC in Bethesda, Maryland.
- AccuWeather in State College, Pennsylvania

Would shorting NGH1 now be prudent? or go long?
What would cause one of those HUGE green spikes upward which I've seen on some daily bars?

Thanks,
Bob (new ng trader)
More...

Hey Bob,

Lol, look every thursday @ 10:30 ET and you'll see these huge candles. Thats EIA storage time and everyone trading is glued to those numbers, especially right now. Another big draw (above most consensus estimates) and look at the market reaction (see Bone's prompt month chart)... at least the market liked this one for 30 seconds or so :p

Concerning weather, I use this link for 6-10 day and 8-14 day:

http://www.cpc.ncep.noaa.gov/products/predictions/610day/

Accuweather is also ok:

http://www.accuweather.com/index.asp?zipcode=&partner=accuweather

If you want to trade futures (I actually trade Canadian Cash markets on ICE) spreads are a great way to mitigate risk - I optimize our inventory using calendar spreads often.

Spreads are cheaper to put on as well (margin-wise).

Remember though, that spreads are giving you a relative return, as opposed to the outright contract.

If you've traded spreads before, just disregard this but maybe someone else will find it useful.

If you think there will be short term weakness RELATIVE to the out months, you would basically be shorting the prompt or a nearer term contract and going long a month of your choosing farther out on the curve, based on your forecasts and risk assessment.
Simple calc to value your spread:
F2 - F1 = SV

Bone is spot on in noting the risk being the correlation to the outrights. IMHO, It's really during periods of high correlation where spreads can more effectively be an alternative to holding the outright position.

Hope this helps
 
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