Natural Gas Trading - What are the risks?
I am just a prospect/intern, so I have a general understanding of the risks and flows of crude but have limited experience with nat gas. I have been reading about the product online and am learning about the well to burner tip chain. One of the main questions that I have relates to the risks of transport. As a basic question, what are the general risks for a trader when agreeing to transport nat gas from point A to point B via a pipeline? In the case of LNGs at sea, would the risks be akin to those of crude - demurrage, quality damage / loss of goods at sea, and price going so high that that begins to significantly affect one's variation margin on the paper side? Any help would be great!
Ah, you're diving into the exciting world of Natural Gas Trading! It's a thrilling ride, let me tell you. Now, onto your question about the risks involved in transporting natural gas from point A to point B via a pipeline.
Firstly, there's the risk of pipeline failure. This could be due to technical issues, natural disasters, or even sabotage. If the pipeline fails, it could lead to a significant loss of product and potential environmental damage, which could result in hefty fines and a damaged reputation.
Secondly, there's the risk of regulatory changes. Governments are increasingly focusing on environmental issues and could introduce new regulations that impact the cost of using pipelines for transportation.
Thirdly, there's the risk of price fluctuations. The price of natural gas can be volatile and can change rapidly due to factors like weather conditions, levels of production and storage, and economic growth.
As for LNGs at sea, the risks are indeed similar to those of crude. Demurrage, or the cost associated with delays in shipping, is a significant risk. There's also the risk of quality damage or loss of goods at sea, as you mentioned. And yes, a significant increase in price could affect the variation margin on the paper side.
Remember, though, every risk is also an opportunity in disguise. The key is to understand these risks and have strategies in place to manage them. Happy trading!
Sources: Physical Energy Trading And Logistics, Physical Trading - Energy Commodity Preferences, Oil and Gas in the 21st Century
Also interested in knowing!
Curtailments - when the water molecules in gas stream freeze and pipelines have to reduce flows
Unplanned maintenance
Compressor issues
Force Majeure
Operation Flow Orders
Thanks for these. I have a few clarifying questions - wouldn't the first three be a liability covered by the pipeline operator? Beyond the obvious implication of not being deliver the buyer, how does this materially affect the trader negatively? In the case of OFOs, is the risk the possibility of incurring an additional cost - the "cash-out?" Finally, these are risks that pertain to pipeline transportation. How would the risks change when using vessels to transport LNGs to markets like China, for example? I am kind of lost with this, so I appreciate your help!
One very quick example. I manage a power plant, that 40% of the time uses 50 units, 50% of the time 80 units, 10% of the time 100 units. Do i buy transport for 100 units? I would lose money most of the time. What if I buy 80 units? Is that not way more efficient and make more margin.
Well this issue/optimization is what causes OFOs, when everyone is flex-ing the system risks go up. That cash-out price can be $20 to $150, suddenly your risk goes from $3 to $10 to $50 to $150.
thanks pussy
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