Energy Markets
Following Midas's review of commodities over the past week or I figured now would be a good time to visit the idea of a more in depth discussion of the energy markets. 10 days ago I posted my first topic about my thoughts on why natural gas was overbought (February contract specifically) in the energy trading group on wso but I am hoping to foster more discussion in the general forum.
My limited knowledge of the energy markets is fairly concentrated in natural gas. I believe that in the short term natural gas is range bound between $4.25-4.65 and I have been trading likewise recently. I believe the only support for natty prices are the cold weather forecasts (that seem to be regularly followed by moderations and thus price corrections) as well as the continued interest in "exposure to commodities" that seems to be the current craze. In my opinion, Natty will remain around the break even production price (and will dip below as long as production is strong enough) as long as supply continues to be overwhelming, and the coal-to-gas switching theory has shown no conclusive evidence, so prices should remain low as long as the rig count doesn't decline considerably. Without the knowledge and research capabilities of major firms I am still searching for input/ideas to further refine my picture of the natural gas markets, so any input/ideas/help is much appreciated.
Another interesting point is natural gas calendar spreads. The March-April spread was around $.65 a year ago and $.45 this summer, and is today around approximately 0, a level which if you had predicted this kind of storage levels you would have also predicted. April-Oct is fluttering around the level that is approximately the cost of physical storage (considering financing etc.). Prices a year or so out are relatively high if you believe that no fundamental changes will occur in the markets in the next 12 months, but I have no expertise to comment on that. If anyone has more input on this, much appreciated.
Also on a side note for anyone looking to trade natty futues, CME reduced margins today by something like 12%. Can't remember the actual figures off the top of my head but frees up a couple hundred bucks for the small investor nonetheless.
As far as crude goes, "it's like a f***ing video game" is my favorite quote so far. I have no original thoughts on the topic and will leave it at that, hopefully someone else will add their thoughts. My one initial thought is that the foregone conclusion of $100 crude will be met with at least a correction or two into the mid 80's.
The consensus on Coal is "go long", and although I know none of the coal fundys I have nothing to refute the long argument so I will stay out. And as for power, making any kind of prediction is for term power traders and not the young wso monkey that I currently am.
Any and all thoughts appreciated. Feel free to PM me with any comments you don't want to post as well. I'm tired of reading the "help me choose between x and x" threads or the "help me" in general and want to foster genuine discussion so I've put my thoughts out there, if you have any input please respond.
At what point do utilities switch from coal to nat gas and vice versa?
Do you take into account index rebalancing. This happened this week and finishes up today.
Nat gas is expected to go up in price because the marginal producers (the shale gas) are producing below cost, thanks to hedges that expire this year. Once these hedges expire, they will be producing for losses, so they will either shut-in production or prices will rise so they can produce at a profit. Look at the financials of the shale gas producers and look at their hedging policies; it's fairly evident to anyone who's done their homework that that's what's going on. Also drilling to keep from losing leases plus the fact that the Street cares more about the production growth number than if that production actually came at a profit (no joke, there are a lot of idiots on the Street).
Oil will go up over the long run, because the conventional cheap stuff is past its peak of production. The facts clearly show a peak in conventional crude production reached around 2004, with a slight uptick until 2005/2006 and then a slight downtick since then. We are at a plateau, and conventional crude production will begin to decline soon. This is "peak oil"; a term that is not often used because of its association with some fairly retarded doomsayers who think peak oil is the end of civilized society (it isn't; though it will lead to a ton of economic hardship). Some are trying to mask this subject by taking about NGLs, tar sands, refinery gain, and biofuels as if they are oil equivalents and adding those to the oil figures so as to not have oil production graphs that show a peak. That's very intellectually dishonest. For this year, I expect an average price in the low or mid 90s. I would short it if it goes over 100, and go long it if it dips to the mid 80s.
Coal will go up long-term, especially if we begin electrifying transportation or doing coal-to-liquids. Nat gas won't be as cheap once hedges expire (in some places nat gas is (or was recently; since coal prices have gone up with what's gone on in Australia) cheaper than coal, which is pretty rare). Nat gas going up allows coal to move up because of the substitution effect from electric utilities.
No comment on power, I don't trade power and don't need to know it for my purposes. I do believe regulations for the power markets are state by state, and trading power is really only something you can do on an institutional level.
Btw, I think that betting on calendar spreads of a few months in nat gas is a good way to get your ass handed to you. Short-term, the commodity is too volatile and driven by very unpredictable stuff like the weather. The only nat gas bet I have is I sold some 4.25 Oct 11 puts back when they were at 0.5 (they're at .327 now, yay). I'm more comfortable with betting on a price floor for natty, rather than going long outright. I think prices are depressed because of what is going on with the shale gas issue, so I don't see much risk of them going down a lot further, especially since those hedges are expiring.
Glad to see a thread about the widow-maker. I have a few ng clients, mostly basis spread traders and marketers. One of them got stung in dec when ny (zone 3?) blew out to 20 over.
Interested to hear your guys' thoughts on fracking regs and basis vol (or lack thereof). Regs.... these could have huge implications on cost of production- EPA report due in April, I think? Basis vol has been sapped out of the market- what do you think? I think its a combo of a down economy, more pipelines, and obviously shale gas. Think the vol will come back, or is it gone for good?
The regs will probably be minimal. Unless the explosion manages to break the cap rock, leaking is theoretically impossible. Maybe they'll have to show that they know where the cap rock is or something like that and not be allowed to blast near it, but anything more onerous than that would be a big waste of time and money. (Maybe they'll also add regs as far as the disposal of excess fluids, etc.) To me, it's a non-issue. If regs are too onerous, prices will go up and there will be a lot of pressure to remove them.
Basis vol will come back sooner or later. I don't follow it too much so I don't really care, but it will definitely come back once the prices start rising again to a level more consistent with marginal supply.
See, I've heard both sides on this. Your point makes sense but I have also heard that there is a general fear of them making the regulations extremely tight at the outset in response to pressure after the BP spill. Admittedly, I'm not the most knowledgeable on this but it would seem that both arguments have, at least a little, validity.
In my view, fears of overregulation are overdone. Still, if regs are too onerous, I benefit, I'm long nat gas since I've sold puts and I don't own the shale gas companies.
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