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Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
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Posts: 5,049 since Dec 2013
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It's a good read, but remember it was written 20 years ago, and some of things it discuss's are now obsolete. EFS, LD3, LD5 are all mostly things of the past.
On the subject of books - not natural gas related - and not trading related - which may make it obsolete, but Petroleum Refining for the Non-Technical Person is a very educational read for the aspiring energy trader.
Ignoring the fact that Barbara Dreyfuss obviously doesn't respect anybody involved, something that she makes clear in the very first paragraph, I agree a very interesting read. I witnessed a lot of what happened first hand, on a major trading desk in the industry, but even when I read it I was a little shocked at the magnitude of the positions they talk about. Knowing one of the major characters personally, and having asked him about it, I can confirm that it's mostly fact rather than fiction.
So here is the curve out to March 2019. What about its shape indicates prices at the beginning of the month will be higher? Just trying to understand the inferences you can make from term structure
If you were to do a spread on CL, would you sell the Sept/October 2017 and buy March 2019?
Here is the difference between the contracts, subtracting the current plotted contract from the previous contract. From what I've read, crude carry costs $1 per contract.
"It does not matter how slowly you go, as long as you do not stop." Confucius
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
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I just meant that with cash prices trading below March, and March trading below April, that implies the market expects prices to gradually rise. In reality if you were to break the curve down to dailies rather than monthlies, you would see an upward sloping sawtooth. Why a sawtooth?
Well lets step back now and talk about power/electricity, because I think it's a perfect example. The standard power product traded is "On-Peak" power. On-Peak is from 7am till 11pm. In the eastern interconnect On-Peak is only Mon-Friday, will in the western interconnect it's Monday-Saturday. This is what they call 5x16 On-Peak, meaning 5 days a week, 16 hours a day. The other products are Off-Peak, which can be split into 2x16 (ie weekend day times) and 7x8 which is nights. Why do this? Well demand is significantly higher during the days in the week, because power is needed both in houses and in office buildings. It's next highest on weekends when people are in their houses and it's lowest at night when most people are asleep.
Getting back to Gas, we don't have an hourly trading market (although some pipeline transmission is traded this way, as power plants, don't need gas delivered ratably across the day) but the physical markets are traded daily. So on Monday, people trade gas for delivery Tuesday, Tuesday for Wednesday etc, and on Friday for all three days Saturday, Sunday & Monday. As in the power example, demand is lower on Saturday & Sunday, so that 3 day package traded on Friday normally trades lower than the other 4 days. (ignoring weather etc). Hence your sawtooth. Tuesday-Friday higher, Saturday-Monday lower.
Now superimpose a gas storage chart on top of that chart and much will become clear. For most months (December is the notable exception) if this months price is lower than next months, then we expect to inject gas into storage this month. The slight summer peak is caused by mid-summer peak power/air-conditioning demand.
The two key spreads traded in the NG market October-January and March-April. These are the spreads that dictate the winter premium to the summer, and also the spreads Amarenth lost $5 Billion on, as detailed in the Hedge Hogs/Cowboy Traders book mentioned a few posts earlier.
Oct-Jan will always be in contango. It has to be. You have to incentivize people to store gas for the winter. March-April on the other hand can go anywhere, and it does, often violently, and often doing extreme damage to the people who have it wrong. Why? Well if we have a cold winter, we pull a lot of gas out of storage. What happens if we pull so much gas out of storage that we run don't have enough? We get scarcity pricing. While this will obviously effect all winter months, one of the things it effects most is the March-April spread. Because no matter how short we are in March, and how much we need the gas, April is an injection month, and relatively unaffected by March's fundamentals. Hence the two completely detach. Now think what happens if we don't have a cold winter, the excess gas in storage we don't use, becomes the first gas we have in storage for the following year. As such that gas has to be cheaper than gas in April, and like this year March drops to a discount to April.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
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There's a very large crude oil thread, and discussions like this have come up several times over there already. Couple of things I will say. Crude carry (land based storage) is a lot lower than $1/month. When your thinking about and trading spreads, I think the second chart, the chart of the spreads, is a lot more informative than the first chart, the actual forward curve. Of course if you spread the spreads, you have butterflies, and their chart can look interesting as well! Whats that crazy kink in Nov-18/Dec-18/Jan-19?
Here's a crude chart for you.... Remember these are just 48 days apart, and in that time the Jun17 prices are only different by 14c!
