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UNG as a hedge?


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UNG as a hedge?

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  #1 (permalink)
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Does any one here know enough about UNG to know if it is an effective way for households to hedge nat gas/propane costs?

https://m.nasdaq.com/symbol/ung

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lrfsdad View Post
Does any one here know enough about UNG to know if it is an effective way for households to hedge nat gas/propane costs?

UNG stock quote - United States Natural Gas Fund LP stock price - NASDAQ.com

Natural Gas is separated into two markets, physical and financial. UNG is designed to trade in percentage term Natural Gas Prices as related to Henry Hub (HH). What you are looking for is to use it at a hedge versus physical.

There is one major problem, the physical market is regionally priced and quoted as a basis to the HH price. Example: Citygate(CG) or hub price: +.12 which represents the regional basis, so the price of your hedge is NG 2.222 + CG .12 = your regional price of 2.342 mmBtu.

So in order for you to properly hedge your physical Natural Gas or Propane (which is similar to wet Natural gas also a hydrocarbon gas) you would need to purchase/sell the HH futures market and at the same time your nearest CityGate future via the ICE exchange to properly price out your regional cost of propane.

Even then it will not be a perfect hedge, but will get you close.

In short, No, UNG tracks Futures price @ HH which is very different than the spot/cash price of gas (which is very volatile from short-term demand shocks from weather).

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Sody

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SodyTexas View Post

In short, No, UNG tracks Futures price @ HH which is very different than the spot/cash price of gas (which is very volatile from short-term demand shocks from weather).

Cheers,

Sody

Last winter propane was over 2/gallon because of shortages. This summer they could fill up around .84/gallon. Current price as we enter winter is 1.10. Doubling in prices can be a huge burden on family budgets.

Nat gas is also cheap again.

@SodyTexas Do you know of a way homeowners can take advantage of lower prices for the long term?

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Not really.. Short of actually buying it and storing it in a tank during the summer. Or hedging it regionally in the futures market. That is the entire reason that the future markets exist.

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Historically propane has correlated higher to Oil/Heating Oil than to Natural Gas (it competes with Heating Oil as a fuel and with Naphtha as a petchem feedstock) but that may have changed in more recent history, it's been a while since I traded any propane.

Propane stocks, currently make crude stocks look low though, 30% higher than previous highs and heading higher.



data...
https://www.eia.gov/dnav/pet/pet_sum_sndw_a_EPLLPZ_sae_mbbl_w.htm

I also agree with @SodyTexas's Natural Gas explanation. I would add that depending where in the country you are, will dictate how much risk is in that basis spread. As an example Q1 prices for Henry Hub (LA) are currently approximately $2.10. Prices in Chicago & Southern California are 10c higher, but prices in New Jersey are 50c higher, New York City $2.10 higher and in Boston $3.25 higher. Yes the differential between Boston and Louisiana is more than the price of the gas itself in Louisiana.

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SMCJB View Post
Historically propane has correlated higher to Oil/Heating Oil than to Natural Gas (it competes with Heating Oil as a fuel and with Naphtha as a petchem feedstock) but that may have changed in more recent history, it's been a while since I traded any propane.

Propane stocks, currently make crude stocks look low though, 30% higher than previous highs and heading higher.



data...
https://www.eia.gov/dnav/pet/pet_sum_sndw_a_EPLLPZ_sae_mbbl_w.htm

I also agree with @SodyTexas's Natural Gas explanation. I would add that depending where in the country you are, will dictate how much risk is in that basis spread. As an example Q1 prices for Henry Hub (LA) are currently approximately $2.10. Prices in Chicago & Southern California are 10c higher, but prices in New Jersey are 50c higher, New York City $2.10 higher and in Boston $3.25 higher. Yes the differential between Boston and Louisiana is more than the price of the gas itself in Louisiana.

I have never traded Propane, so I would take SMCJB word on the correlation. I only assumed that propane would correlate with Natural Gas for the same reason, its used for a heating source. Stock in NG is primarily impacted by the heating degree days (HDD) and cooling degree days (CDD) in the region that it was priced. I have a forecast for Natural Gas buld/draw here if you want to learn more. Make me wonder how the model would work on a commodity such as propane; but, since I don't trade it doubt I would take the time to build it.

SMCJB makes since to me, as Heating Oil and Coal is always competing against Natural Gas for electrical generation as well.

Energy Markets are fun!!!!

Sody

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SodyTexas View Post
Energy Markets are fun!!!!

Energy markets are awesome!

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Be very careful about how UNG is trying to track the underlying. If you have a wierd contango or backwardation where a contract rollover is going to gap adversely in prices, then your hedge will fall apart.

Additionally, in general UNG will tend to lose value over time as a function of both rollover costs and just management fees, so it won't be a perfect hedge. You are better off looking at other correlated instruments and/or just hedging directly on the options, or as your post may imply, if you already own the underlying physical commodity, then you should be naturally hedged already without having to look at using UNG as an imperfect hedge.

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