I know this is a futurs forum, but I am just curious if anyone on here has experience trading the physical part of the energy complex, and using the futures as a hedge?? I am reading about physical trading, and it seems way more complicated than any derivatives that I am used to.
Hi Comanche I trade UNG/oil stocks & read your knowledgeable posts with interest. I come from a Import /Export whole saler background. Traded Japanese /Korean Electronics in to CHINA during the nineties. Also Import/wholesaled physical bullion to smaller wholesalers in the recent past.Once in a while import coal & sell to foundries nowadays. Since I assume you are based in US,do you buy physical crude from foreign/domestic Exploration production co's/brokers with storage to be arranged by you ? Are you selling futures to lock up any gains or just buying from Exploration co & selling to Refinery? what is the minimum deal size? Is it 1 tanker size? Do you open LC or any DP/credit? Or you are just participating in the financial risks pf the physical Crude with derivatives with out getting in to physical logistics? I will be grateful if you would explain the mechanics of the crude trade... Thanks
I also work for a shop that trades phys. I am new to the industry though. Phys is more complicated than futures because all you have to worry about with futures is the long/short/cal spread bit. Phys has like eight different ways to trade the same thing. In my noobie opinion. Which book are you reading? Nat Gas trading by Sturm?
Not sure how this relates to nat. gas, but as far as oil/gas is concerned, what are the different types of exposure associated with putting on a physical postion, i.e. flat price, basis, fixed price. I am getting confused with all the terminology. Also, as far as EFPs are concerned, when and how do the two traders that enter into the deal agree to post it? Finally, again with the gasoline, say you buy one cycle and sell another, are you still considered exposed(?), and what about if they are on different pipelines?
In natty, there are predominantly 4 ways that physical molecules are bot/sold. I will list them and the exposure with each: Fixed price- this is how roughly half of the daily spot market gas is traded. Obviously the risk is buying too high or selling too low if your benchmark is daily index. Alot of guys don't care what price is, it is about covering a transport cost and selling for a profit at another point. Gas Daily index- The other half of daily spot gas gets transacted on the platts gas daily indexes. These indexes are a weighted average of the fixed price deals that are done at each location. There is not really much risk in this unless you are at a very illiquid point, then you may get a bad posting but most stay away from illiquid points on gas daily. Inside FERC first of the month index- the majority of gas that transacts during bidweek (last 5 business days of month for the following months business), is done on inside FERC postings. These are the famous indexes that got many a trader in trouble for reporting bogus data to skew the index in their favor. The index is comprised of all fixed price deals done for the following month and physical basis deals, running an average of the 2 for each point. Again, not alot of risk except illiquid points and points that are easily manipulated (energy transfer is in a heap of shit for doing this at a few texas points). Physical basis- This is transacting gas at the NYMEX last day settle price for the respective month +/- a premium or discount. It is basically taking the sum of financial basis and inside FERC index for a location. Example, I bought 10,000 MMBTu per day of Tennessee 500 leg at NYMEX last day minus .09. NYMEX settled at 6.11 for September so I buy the TENN 500 leg at 6.02. There is really no risk with this price unless you are benchmarked against IF index and index comes in lower than 6.02. EFP's are more or less just used to layoff cashflow risks. If we get a bunch of producers selling futures to hedge, we wind up with huge margin requirements from our FCM, so we lay it off with an EFP or EFS (we use EFS mostly now). So I call a counterparty and say I need to buy 200 Sep futures and sell the swap (EFS), and we agree on prices and call the floor. The floor posts the EFS at our predetermined price and i have closed out my futures position. The hedge is now in an OTC swap with my counterparty. As far as the pipeline diffs, I play pipe to pipe spreads all the time in natty, there are many risks. Operational risks (unscheduled outages, etc), and regional weather risks (TX vs. LA) that can blow basis out in different areas. So it is all about having the information and correct prognostication to choose the right spreads to play. (I bought Houston Ship Channel and sold WAHA gas for Sep as a spread physically at a .16 differential) lets see how this does as I see weather heating up in the east relative to the west which should widen this spread.
excellent post comanche!! thank you!. From what I understand the ICE OTC NaT Gas is like 3 times de size of the Nymex OTC Natty trading? Im not so sure, but i think that the ICE OTC Gas market trade over 34 million contracts last year vs 10 million OTC Nymex Natty contracs. I'm Right?
The way the ICE swaps trade is volume per day. Smallest size is 2500 mmbtu/day whcich is equal to 7.2.5-7.75 nymex sized lots. The ICE swaps are futures look a like swaps. They are strictly financial. Cash settled as opposed to futures which require physical delivery if taken in to expiry. And yes the volume is usually higher in terms of nymex equivalent. I thought it was around 150% more volume. Could be more.