Why not learn from history? Some really good pertinent data and info on these slides, I highly recommend. http://www.garp.com/library/Meets/GARP Presentation October 2006.ppt#1
sorry for any confusion, like I said, storage can get complex with many parameters. To try and simplify: I have 3 BCF in the ground, I don't want to take it out in the spot market with cash trading -.50 to Feb NYMEX as I could take it out in Feb for .50 more. But why take it out in Feb when I could take it out in March for .18 more. Repeat this until you get to the best price forward in the next withdrawal season (8.903 Feb of 2008). Due to this, I would elect to set my hedges (sales) to next Feb via NYMEX. Now, for me to take it out any earlier, the spot and/or futures market will have to trade higher in the prompts for me to sell it now. Lets say when cold comes mid-month, (forecasted now BTW), and spot trades .30 over current Feb futures, I can now withdrawal gas and buy Feb futures to reinject my gas at a lower price and cover my associated costs of tport and fuel. Now forget spot/futures. Lets look at forward strip, I will make up prices for example. G7 6.00 H7 6.20 J7 6.30 K7 6.40 etc. etc. to winter X7 7.50 Z7 8.00 F8 8.50 G8 8.60 H8 8.40 If I had gas in the ground, I could not withdrawal and reinject at any point in this strip economically. When it gets cold, you have to price up spot and/or futures to get my gas out. Now lets change this forward strip reflecting a return of cold induced demand: G7 7.50 H7 7.60 J7 7.10 K7 6.90 M7 6.98 N7 7.10 Q7 7.20 U7 7.30 V7 7.50 X7 7.90 Z7 8.50 F8 8.80 G8 8.90 H8 8.60 With this curve, I would now withdrawal my gas in March and buy futures as a hedge for reinjecting it in May all while leaving my forward sales in Feb of 2008 intact. Does this help?
Ahh now I understand. So I would not realize the loss on the hedge, I keep it place As long as there is some sort of backwardation, whether it be spot to prompt month, or prompt to the month after, etc.. I withdraw to sell to the nearer month, and buy a contract to refill for less at a later time but before my hedged contracts expires. On another topic, you were a local at the NYMEX right? Do you think pit trading there will go the way of the dodo and they will all go to screen or is there a future for pit traders?
So then I guess my question would be, if it only costs $0.80 per mmBTU per year to store, why wouldn't I buy all the storage I could and NGG7 contracts to fill it and sell NGG8 contracts? The spread is $2.50 right now between the two NGG7 @ $6.30, NGG8 @ $8.80. As long as I can buy storage for under $2.50- $$$ for gas loss and transport it should be a profitable move right? Is storage seriously $2.50 per mmBTU for 1 year?
That's a hard one to guess, as much as I loved the floor environment, I must say that I really love GLOBEX!! no more 2 cent 2 ways with "touched but unable". But I still do use them sparingly to execute EFP's (exchange for physical), and EFS's (exchange for swaps). I feel sorry for all the floor clerks, some of which have been down there for 20 years and longer and don't know much else to do. The floor traders/brokers however have had a windfall in the value of their seats with the exchange going public. When I left in 2000, I could have bought a seat for ~650K and leased it out for about 9-10K per month. Now that would be worth about 12 million or so just on the seat package alone, ad in all the return on monthly leases. Where was that magic 8 -ball when I needed it??
thats a beautiful example. so here's the clincher: considering the storage picture, is cold weather enough to drive gas up at this point?
OK, I think I'm starting to understand... so when you said there wasn't much juice left to the downside because of storage economics, you were referring to the idea that storage costs are less than the spread between NGG7 and NGG8 and so the dynamic play would be that regardless of weather, storage economics dictate a bottom to further drops in gas price around these prices (i.e. storage costs < $2.50 1-year spread). Then adding some cold weather on top and large open interest from naked shorts and you have a short covering bonanza? Am I understanding this correctly? So you see storage economics putting a floor on drop in prices, and storage economics also limiting how much March could rise above April (which I think you mentioned in your other thread and I really had no friggin clue as to what you meant then, lol) In other words were you saying March can trade above April because of a run on March supplies, but eventually people with stored gas would withdraw and sell the March contract and then buy the cheaper April to refill, with the critical threshold being determined by the transport costs of taking out the March gas and refilling with April gas, plus all those other withdrawal/reloading costs you mentioned? i.e. Once March trades above April an amount >= withdrawal/reloading costs then the spread will stop increasing because stored gas will be sold to march and bought from april? Sorry for the long posts, I just find this fascinating.
Seems like no one cares about the incoming cold weather. Might be because of the insanely horrific withdrawal numbers coming up. The gas flow models are showing a really low draw for the last week of 2006 (week ending 12/29/06, report 01/05/07) in the -53 BCF area, more than 60% below the 2001-2005 5 year average. For this week (ending 01/05/07, report 01/11/07) they are showing a tiny draw around -36 BCF. That's insanely low, 75% below the 2001-2005 5 year average. Weather forecasts show warm weather through the 12th, so another really crappy withdrawal. With withdrawals of -53, -36, -60, we'd be at 3018 in gas stocks for the week ending January 12th, the 5 year average is 2214, last year we had 2516 bcf in storage. 20% above last year and 35% above the five year average. To work off a 500 BCF surplus versus last year we'd need a solid two months of below normal (read: frigid) temperatures across the US, three solid months to get to 5 year average levels.
Natty is now poised to go into a larger short covering rally that could possibly extend for awhile now. I am buying outright longs now in feb in addition to the H/J spreads I am holding. I think feb can get to minimally $7 and possibly much higher.