Time to bottom pick

Discussion in 'Energy Futures' started by Comanche, Dec 28, 2006.

  1. I know that bottom pickers usually wind up with stinky fingers but I have been patiently waiting to enter into this trade. I am talking about the Motherrock Killer, the Amaranth crusher, the March/April Natgas spread. It is trading around .09 to the April. The risk/reward is probably about 1:5 as i think this is more of a dynamic play than a fundamental play at this point. The open interest is huge with funds eventually needing an exit strategy for taking profit as there is not much more juice left in this on the downside due to storage economics. Open interest is as follows:

    Feb 77,812
    Mar 127,509
    Apr 97,815
    May 47,240

    It is evident that the size of the O.I. in the spread is why march O.I. is much greater than the prompt. I will be buying the March/Selling the April this a.m. Wish me luck.
  2. Good luck!

    You've been waiting patiently like a sniper the last week for that natty spread, eh? I remember your post.

    I ended up covering the short in the upper $6.60's like I contemplated and then I took the long April, short March spread through Thursday, and went long March at the close on Friday.

    Can you explain what happened with the February March spread on Friday's session? It looked like March rose something like $0.11 while February natty only rose $0.05, would have made a big fat $600 per spread.

    I'm guessing the medium range weather forecasts = traders feel february is screwed but all the model plumes show El Nino crashing during mid-February = March cool down, so they are contemplating a run up in NG demand in March? Is that about right?

    I'm long March only, but if the funds who are short March and long April cover, how will that affect the short February long March spread?

    Take care,
  3. March should trade higher on feb unless we get cold for a bit, even then i don't see feb at par or over april, as the biggest short at the moment is in the march. With the change in forecast coming i expect a nice profit taking pop in the mar/apr. if we are real cold at the end of jan, you could see feb trade over to entice storage out. cash has been trading at a discount for most of winter as the weather has been shit.
  4. Damn, good point, I didn't notice the prompt month had less open interest than the next two months. That does explain the pre long weekend short covering being more pronounced for March than for February.

    Thanks comanche.

    Btw, I don't think I even can display open interest for futures with interactive brokers, I only see an Options Open Interest column that I can add to my display. The COT reports only have aggregate OI for all months.

    Where do you get your month-by-month OI information from?

    Some day I'll figure out what the storage economics you keep referring to means exactly... some day.

    Take care,
  5. You are going to bear spread - buy the April and sell the March?
    Or vice versa?

    I was in the same spread that Amaranth but managed to cut my losses after about 15 cents...Thank god for stop losses!

  6. do you have a price target in your mind of this spread?

    also, can you outline the 'storage economics' you perceive that move the mar/apr spread?
  7. Price target is a little tricky as we are definately not in a supply crunch for the remainder of this winter, but i do see the potential for mar/apr trading up to .20-.30 march over.

    the storage economics can get very complex with many different factors affecting different space holders. i will keep it simple.

    Traditionally, storage contracts commence April 1st and run until March 31 although many people take out space for much more than 1 year. So injection season runs from April 1 through October 31, then withdrawal season starts November 1 and runs through March 31.

    Lets say I have contracted 3 BCF (billion cubic feet) of space for 3 years at a cost of .80 cents. That would be broken down into a monthly cost of .0667 on the full amount of space (3bcf) regardless of whether I had it all injected or not. Then there is the costs of pipeline transportation and fuel, injection fuel and possibly a small fee for injection of commodity. When it's all said and done I have certain costs on top of what I purchased for injection that would give me a true breakeven cost of my stored gas. And of course I probably hedged most of my winter withdrawals when i was injecting to reduce fixed price risk of market falling off. Also a factor is basis risk depnding on where I physically have the gas, and some basis points have quite a bit of volatility. So once you factor all these different parameters together and have your cost, you try to maximize or optimize your profit by withdrawing gas at the best economics for you.

    Historically at this timeframe, remaining winter (Feb and Mar) is trading premium to summer thus enticing storage sales as you can reinject in summer for less thus "cycling" your storage. Sometimes during the intra-month, cash trades well over nearby futures further pulling storage out. The problem with this winter is we have had no weather and cash has traded quite a discount to futures. Also the market is quite contango as we are in a well supplied situation. So your non-utility storage holders have been rolling their withdrawals out to next year as it would make no sense to pull out now for the cheapest price on the board. If you have the luxury of rolling forward, you are now sold in Jan and Feb 2008 futures as your hedge.

    Enter weather. If cold were to return, you would have to trade cash over nearby a good bit to get the rolled gas back to this season, making it profitable for me to buy back my hedge for next Jan and reinject in April or May. Now if we were to finsih Jan very cold, you could see Feb and Mar trade over early summer as gas will be needed out of storage to meet demand and one heck of a short covering in the large Mar/Apr open interest.

    I hope that wasn't confusing to anybody as it can get much more complex than what I outlined (TVM, etc..), but in a nutshell, a contango market at this time of the year is not normal and a return of below normal weather should create some good spread volatility.
  8. from here some of this was a little confusing, I'll admit - mostly because its not clear hedging means buy or sell gas here since I'm not sure if you're referring to the storage operator as the buyer or the seller (because storage operator buys and sells, regardless) ... sorry for my slowness.

    so ... when you refer to hedging withdrawals, which side, by buying or selling? do storage operators and those trading from the storage angle (ie leasing storage, and playing the cash, futures, etc storage shuffle) tend to be producers, or end users of gas (utilities)?

    are you inferring there is a gigantic short march, long april spread interest (instead of the opposite) and this will have to unwind?

    but fundamentally this is a weather bet? (a cold spell for jan)

    at this point, to me I stand back and question what holds this market up at all, considering storage dynamics could potentially dominate the entire game. Whats to keep gas from trading down to 2.50-3.50? (all i can think of: bullish oil sentiment, technicals, and the fact hurricanes exist) We could have 160bcf weekly withdrawals from hereon out to the end of winter and it would not dent storage at this point.

    To me it would seem the only -fundamental- support that concretely exists in this market, considering the weather we've had, would be the potential of major producers willing to sacrifice massive revenues (in next 3-6 mos) by shutting in large amounts of gas to work off this storage predicament.
  9. I understood everything until

    "Enter weather. If cold were to return, you would have to trade cash over nearby a good bit to get the rolled gas back to this season, making it profitable for me to buy back my hedge for next Jan and reinject in April or May.

    Now if we were to finsih Jan very cold, you could see Feb and Mar trade over early summer as gas will be needed out of storage to meet demand and one heck of a short covering in the large Mar/Apr open interest."

    So the storage economics part of that:

    I have bought storage long term and I am paying for it whether or not I'm using it to capacity.

    Weather was crap the past month so I decided to hold my gas in storage for higher prices, and hedged by buying NGG8.

    NGG8 is Feb 2008's contract and it is trading at $8.90 and is my hedge.

    So now cold returns and the cash prices rise and Feb/March 2007 rises, doesn't Feb 2008 also rise by the same or equal amounts? Why would I want to realize a loss on the hedge to move to the cash market?

    Is that what you're referring to, the hedgers are stuck with their rolled over storage and so there's a lack of gas available for utilities who now need it because of the cold?
  10. Quick question:

    I find that when bottom fishing, usually the move doesn't end until one of two things happens. Either the market hits a kind of "puke point" for the longs and they all give up on heavy volume and a big down day (usually after an extended downtrend) and then the market reverses strongly to the upside; or, the market just kind of withers at the lows, becoming almost dead, as if it is completely "sold out".

    Now I know pretty much nothing about natural gas spread trading, but if you're looking to pick a bottom, have either of those 2 things happened yet? If not, do you have an idea when/where it might.
    #10     Jan 2, 2007