As you already know, natural gas has essentially been hit by a
low-demand during summer 2014.
Production has been very str...
It is difficult to provide what will be the next direction. Two
weeks ago, there was a heat wave forecast but it has never...
(click to enlarge)
The historical analysis of the January Futures during the month
of August shows that since 2010 prices ...
Fat tails show that natural gas has tail-risk i.e. a possibility
exists in this market for a many standard deviations even...
(click to enlarge)
(click to enlarge)
4$ is a key support for Nymex January 2015 Natural Gas
Winter is just around the corner as well. The hedger of a large
natural gas industrial user is facing odds of a 50c increa...
As we are legging into September, it will be interesting to see
what effects a mini heat spike and the hurricane season wi...
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Natural gas gears up for the hurricane season and winter pricing

As you already know, natural gas has essentially been hit by a low-demand during summer 2014. Production has been very strong, but we do still have to play a bit of catch-up on the storage level to get back to the 3.5 tcf range. CDDs can be used to tracks how much demand there has been for energy needed to cool-off building in major U.S cities during this summer. HDDs do exactly the same but for heating in the winter. Simon Jacques is a trader. Mr. Jacques lectures the Derivatives Products course at the University de Moncton and offers Commodity Merchant Trading and Shipping Advisory Services. You can visit his website at jacquessimon506.wordpress.com
Published on: Mar 3, 2016
Published in: Data & Analytics      
Source: www.slideshare.net


Transcripts - Natural gas gears up for the hurricane season and winter pricing

  • 1. As you already know, natural gas has essentially been hit by a low-demand during summer 2014. Production has been very strong, but we do still have to play a bit of catch-up on the storage level to get back to the 3.5 tcf range. CDDs can be used to tracks how much demand there has been for energy needed to cool-off building in major U.S cities during this summer. HDDs do exactly the same but for heating in the winter. (click to enlarge) (click to enlarge)
  • 2. It is difficult to provide what will be the next direction. Two weeks ago, there was a heat wave forecast but it has never materialized. Natural gas market is extremely competitive; I don't think there are major imbalances now because of the supply-side but it would also not take too much to turn this market on the upside. Both CDD and prices are depressed, we are entering in the Hurricane season and winter demand is just around the corner.
  • 3. (click to enlarge) The historical analysis of the January Futures during the month of August shows that since 2010 prices are populating the left part of the curve. In statistical terms, the market price distribution has a little skew to the left and has fat tails. The skew to the left reflects years of low-prices/high production like (2012, 2013, and 2014). The market is printing in the left corner of the distribution and is filling a gap (illustrated with the Dotted line). During August this contract has populated the zone between $ 4 and $4.25 which corresponds to the blank space the between the dot-line and the market line.
  • 4. Fat tails show that natural gas has tail-risk i.e. a possibility exists in this market for a many standard deviations event like Hurricane Katrina in 2005 (10.26$/Mmbtu). Referring to the right-tail, Futures Magazine Editor and derivatives industry veteran Daniel Collins has that this feature it's not unique to this period of the year and that at current price s, there should be more risk to the upside as we are entering the hurricane season. Physicals and Futures During last February, the winters had eclipsed the summers and a lot of premium was built into both the winter the summer natural gas forwards basis. It appears that merchants have been short physical gas because of these large premiums and that later-on, it has been another price driver for the Henry hub futures. The September 2014 contract is what is mirroring the current physical market's expectations is now traded at $3.80 and it will be difficult for the market to attempt going lower than $3.80 because at this level gas will remove some coal from the generation stack. The coal-to-gas switching seems to keep a floor around $3.80 from the Southeast. In case of changes in the weather forecasts, the Day-ahead market will not feel the heat because record production will act as a cushion for higher cash prices. This theory is at least confirmed by very flat basis at key hubs and current traders' expectations in the forward market at physical hubs. Futures CAL 15 Strip appears to be at a key support level
  • 5. (click to enlarge) (click to enlarge) 4$ is a key support for Nymex January 2015 Natural Gas
  • 6. Winter is just around the corner as well. The hedger of a large natural gas industrial user is facing odds of a 50c increase even if weather doesn't totally showed-up like last year. The prompt fundamentals and weather are depressing the winter curve. The Bottom line is that the market right now provided an opportunity to hedge-up. Let's call it risk, simple words. The January futures contract can move 20 c down and meanwhile has an upside of 50c until the winter. Bearish Factors: • Mild weather forecasts for August or September. • Strong production and strong storage injections. Bullish Factors: • Low inventories; reported storage by EIA is 18% below 2013. • Net LNG exporter (imports are very low) • Cal15 and Jan15 are traded at key support levels. • Catch-up on the storage level to get back to the 3.5 tcf range. • Moderate weather driven support coming this season. In the face of the current natural gas fundamentals, this market doesn't appear mispriced. If you look in the windshield, not just in the rear view mirror of the summer, the bias is slightly up. It might be the good timing to buy the January minus prompt spread or selling Jan 450 calls or buying the strip.
  • 7. As we are legging into September, it will be interesting to see what effects a mini heat spike and the hurricane season will have and after that the winter pricing. Simon Jacques is a trader. Mr. Jacques lectures the Derivatives Products course at the University de Moncton and offers Commodity Merchant Trading and Shipping Advisory Services. You can visit his website at jacquessimon506.wordpress.com

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