Q&A: Director of Energy Trading

very much depends on the year. In a LCOL area, guaranteed comp mid six figures with all cash bonuses that can be in the low seven figures. I've made enough that I'm in my mid 30s and I'll likely semi-retire in the next couple years.

1. Its not the ISOs, its the state programs that are behind the renewable mandates. SMRs should be used way more widely and nuclear is the best combination of clean and reliable we have. Its a shame that the US isn't expanding the use of nuclear and Germany shutting down its nukes is so stupid. NG Combined Cycles are still being built throughout the US and they have been key to replacing old coal units. The generation mix is always a challenge but the biggest issues for expansion on any new generator right now is people and steel. We are in a resource crunch in the industry and new generator additions aren't realizing as planned because materials are hard to come by. This is impacting new gas and oil wells, new pipeline additions, new renewable additions, and so on. If these latest federal bills on chips and inflation pass, it should help bring manufacturing back to the US and help solve some of the constraints, however, the solutions from that aren't going to be seen in the short term. It takes time to build new facilities and the NIMBY issues have to stop. The US also needs to get rid of the Trump tariffs. They were bad policy to begin with and its a real shame that Biden hasn't done anything to change that policy.

2. I work for an energy trading company. We have physical nat gas and power business and also have power and nat gas speculative trading groups. I deal mostly with utilities and companies on the demand side of the electricity equation but we do interact with generators, especially on gas supply. I have tried to do business with generators before on the power side but unless they want a block hedging program, I am generally not a fit. I think most of the volatility products the generators sell are too expensive and I can create products with better/similar payouts for cheaper using futures and options.

3. I'm much more concerned over cybersecurity of the grid and weather events than electric vehicles increasing demand. If improved smart metering and time of use rates flatten the demand curve, it will actually make the whole industry more efficient. The power grid can absolutely handle the demand, there are only problems when stuff breaks and that's usually caused by weather events. For example, the issues in Texas in Feb 2021 were because of pipelines and compressors freezing that impacted the flow of gas and made it so generators could not run. Many issues during the polar vortex in Jan-Feb 2014 were a result coal piles freezing (ISOs may structural changes to address this). The power outages and emergency procedures in Ohio in June were because storms knocked out key transmission facilities and the ISO had to operate the area under N-5 conditions (don't usually see much worse than N-2).

I'm not gonna provide my personal curve but yes there is still upside. Here's a few things that I think can cause the upside/downside

1. Weather - short term, weather is the most important factor to get right in power trading. Demand, especially in the summer for power and winter for gas, is weather driven. A cool summer means less AC used and lower power burns, prices drop. A warm summer the opposite. In winter the opposite relationship but same idea. So far this year, we have had a very hot summer and that has driven natural gas power burn to record levels. If that continues, we will see additional demand that will increase/hold up prices. My opinion is the price curve is anticipating the warm weather to continue for at least August. We are also approaching hurricane season in the gulf and hurricanes have generally become demand destruction events. A note to anyone wanting to get into energy trading, learn meteorology.

2. Freeport LNG - When does this return to service? That's 2bcf/day of demand everyday that's gone right now. They say they are returning Q4 but I don't think the market really believes that. If Freeport didn't have its issues, I think we are at $15 instead of $8 right now. There's probably some nat gas traders reading this saying we would be way above $15 and I don't think I could really argue against them. The curve would be very very strong.

3. Production - Most natural gas data vendors that provide production forecasts insist on seeing several bcf/day of new production before the end of the year. The forecasts for production have been missing high all year but rig counts are increasing. I believe the market is discounting the forecasts.

4. Recession trade - I'm not going to get into whether we are in a recession or not because the technical definition doesn't really matter but if people are struggling to pay bills they will adjust the thermostat and there will be less demand. Businesses may shut down = less demand and so on. I think we are starting to see hints of this occurring but its just hints and determining whether its just noise or actually happening is very tough.

5. Europe trade - To me, this is as much a psychology/sympathy trade than anything because it doesn't matter if Europe is 20 or 50 dollars for gas, its in the money to export, however, if the issues with Russia continue, the US will export as much LNG as possible and that's additional demand. If the Russia/Ukraine war stops and Russia starts exporting more gas, global prices will fall but the US will then turn more gas to Asia. The spreads are so far in the money that exporting as much as possible should continue regardless. That said, if tomorrow there was a headline for a peace deal, nat gas prices everywhere are going limit down.

As for the softness in Q2, the big thing is the production forecasts. We are currently at ~96 bcf/day and many forecasts for Q2 next year start to get to 100-103 bcf/day in Q2. There will be some LNG additions to offset that but if that forecast actualizes, the supply/demand balance for 2023 looks fine and that is what the curve is saying. There's also the growth of renewables and batteries (EIA data says we are adding about 2 GW/month of renewable capacity) to offset power demand and depending on where new nat gas combined cycles are being built, I think they may start to make the power burn more efficient (replacing a 11 heat rate CT with a 6.5 HR CC) instead of just replacing coal plants.

If you gave me a completely open book with no existing positions and free rein to trade power, I'm probably selling covered puts in Q1 and buying Q2.

As they say in commodities, the cure for high prices is high prices. I don't think we are going back to the extreme low prices (2 handle for nat gas, sometimes lower in supply areas) of the mid-late 2010s anytime soon, if ever, because of the global nature of natural gas now, however, I don't expect the very high prices to last past this winter unless there is a significant weather event.

I also don't think 2010s were necessarily bad, just different and tougher. I wasn't around during the 2000s but I have been told by several people at my company that is was easier to make 5M before the Great Recession than it was to make 1M in the 2010s. Even with that, we still made millions and met company goals almost every year. For me, the 2010s were the baseline and what I was used so I would say that adjusting to the new higher priced time-period has been a bigger challenge than dealing with the low prices of the 2010s. From a structured products view, in general the 2010s may have been very boring and it was tough to have huge years because of how volatility dropped, but the vol dropped for a reason so while it was difficult to have a gigantic year, it was fairly easy to have a decent year.

This is all a very long way of saying that there will be plenty of money to be made in energy trading even if prices drop back to where they were late 2010s, though I don't see that happening unless the upcoming/current recession is really really bad.

The power curve is already pricing in a "return to normal" over the next 3-5 years, but those prices will still be higher than what we saw pre-covid and reflect gas in the range you said  (cal 25 nat gas is ~$4.5). For regulated areas of the US, the prices paid by consumers will reflect the curves even if there are timing differences because of how rate-cases are determined. For deregulated areas, one of the biggest impacts of the move this year will be the requirement of increased premiums in deals. I'm actually surprised I haven't seen more bankruptcies from the higher prices because if a retailer or wholesaler didn't hedge properly and had a portfolio that was effectively short, they will have gotten killed by this move. It also costs more to run a load shop right now because of higher margin requirements from the exchanges and collateral requirements from the ISOs. The memory of this move will be felt in the market for years and it will be reflected in higher prices for consumers.

This one is very tough to answer but going to try to break it down a bit by region and say what I believe the major issue is, if there is one. That said, my expertise is in the northeast and while I know the other regions and am familiar with many of their issues, there's probably someone better to answer. In general, I'm more concerned with a cybersecurity/hacking issue than a supply/demand balance issue

PJM: No concerns. If anything, PJM is oversupplied and I think it will remain that way for a while.

NY and New England: No real reliability concerns but there will be issues with price due to gas deliverability. The NIMBYism of this region is huge and could cause long term problems but if the off-shore wind programs develop as planned, they will be totally fine. Just a note, as planned to me means a couple year delay for me. Nothing ever goes exactly as planned in this industry and there will always be someone suing you that will cause a delay. Getting rid of the Jones Act could help too, that is an outdated and idiotic piece of legislation that should have been dumped many years ago.

MISO: The footprint of MISO is huge so there will certainly be locational (congestion) issues that come up but as a whole I think the area will be fine. I feel like I have been hearing about capacity shortages in MISO Zone 7 for years and there have been zero blackouts so that's a major reason why I am not concerned. There's a greater risk here than in PJM.

ERCOT: What many people don't realize is the ERCOT market is behaving exactly as it was designed to. The incentive for new generation is provided by the extreme high prices from shortage events. From a reliability standpoint, I believe this to be a horrific design because you have to have shortage events where prices spike to incent the market to build. Without them, prices stay low and no one builds until load growth overtakes supply growth and you get more shortage events, which incents build and so on. Because of this, there will always be risks of blackouts and reliability issues.

CAISO: Of the regularly traded competitive markets, this is the area where I am least familiar. With that disclaimer, CA has a couple issues that I think could cause reliability issues. The dominance of solar creates a load shape that can be difficult for system operators to manage and CA gets a lot of power from hydro imports. I think the water issues of the west could have a big impact and if CA loses some imports, it could be short power. In order to better manage all the solar, the region needs to install more batteries. I think that's a very solvable issue but the water/hydro import issue may not be something that can really be "solved" outside of finding a new power source and due to regulatory issues, CA will be behind if this happens and could have issues. 

For the other regions (SPP, Southeast...) I don't really know enough to give you an informed opinion of what the regions will look like in 5-10 years. Right now, as NattyPhys said above, the biggest issue is the Southeast and the gas supply. I've heard a rumor that part of the negotiation with Manchin for the Inflation Reduction Act was that the Mountain Valley Pipeline would finally be approved and while that won't help the SE much in the short term, hopefully that means more gas pipelines will be looked at for the positive reliability and price impacts they have and that could help the Southeast.

You're welcome and I should have been clearer on this at the start, but I never worked in the oil division of the company. The company was 90% oil 10% nat gas and electricity and I worked within the nat gas and electricity division, which they called energy marketing. I had plenty of interaction with people in the oil business through various programs but never worked with those groups directly.

When I started, I was building tools for the real-time power traders and gen ops desks. This is where reading the manuals and knowing the detailed rules helped the most. I stuck from the rest of my group because even though I was by far the youngest person and had the least experience, I was able to find issues with bid strategies and optimization techniques and improve the P&L of the group, which got me noticed by the trading group and helped me interact more with the traders. Some of the strategies involved handling the gas so that is where I worked with the nat gas traders and schedulers and learned a lot about that business.  

Just being aware of nat gas and electricity markets in high school probably puts you ahead of 99.99% of the population so don't worry about being young and not having a lot of knowledge, you will get there over time.