You'd have to be crazy to trade the Nymex/ICE spread - products are not interchangeable -- not until LNG accounts for a considerably larger percentage of the overall natural gas market at least. Nonetheless, would also be curious to hear if anyone is trading this and what their thought process is behind doing so. I would think you'd want to work very tight stops on any fading/mean reversion strategy for certain.
I have followed this market for a couple years now, I am getting set-up to trade this. The trade is in the arb between points and knowing the individual dynamics of each physical market. One wouldn't be crazy to trade this, in fact I would say this market is still inefficient enough that there is enormous opportunity IF one understands these dynamics. Over time, like all other markets, it will become efficient enough to close the easy trades. Bone, you trade this yet?
As long as by arb we're in agreement that it is purely statistical in nature with a slight edge in knowing information on delivery points and individual dynamics. Because unlike WTI/Brent where one could theoretically delivery one product in place of another this would be impossible with natural gas. Thus, I would think any premium/discount that the futures trade to the spot between markets would be a product of their own localized supply and demand and unless these relationships got particularly skewed one could not make a high a probability trade. In the case of natural gas in particular, the supply is controlled by turning a valve on or off and storage when and if demand declines is very easy for "producers." As such, I could see minor deviations occurring based on localized disturbances that might not "revert" and major disturbances as a result of natural disaster and other shocks that might be even more prolonged. That being said, I am intrigued and I'd be interested in learning more about your strategy. What would be the time to be in a trade? Is the trade trending in nature or mean reverting? Have you tried this strategy with WTI/Brent? or is that, per your previous post, too efficient a market in your estimation?
I know natty physical like the back of my hand, i know very little about the crude on a global physical basis and wouldn't trade that for myself. The LNG is purely a physical dynamic that I would rather not educate the board on, not at this point at least. This would best serve me at a hedge fund as my current shop limits my ability to fully exploit. I pretty much trade NYMEX natty spreads exclusively here, on top of physical gas around the gulf coast.
Hope this can help http://www.kgu.or.kr/download.php?t...6cc64d59c69948537.pdf&rn=PS3_3_Holleaux_s.pdf