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Nat Gas: Trading the WeatherNYMEX: Micro Henry Hub Natural Gas Futures ( CME_MINI:MNQ1! ) On December 31, 2024, the lead contract of NYMEX Henry Hub Natural Gas futures closed at $3.6330 per MMBtu. This marked a strong gain of 44.5% year-over-year, making it the best performing active futures contract for the year. Nat Gas is one of the most actively traded commodities. According to CME Group: • Henry Hub booked record trading volume in 2024. Average daily volumes for futures and options were 566,000 and 242,000 contracts, respectively. • As of last Friday, Open Interests were 1,511,978 for futures and 775,176 for options. The Basic Natural gas is a leading energy source for global economy. While clean energy generates a lot of buzz these days, natural gas still carries the biggest load in power generation. The U.S. Energy Information Administration (EIA) estimates U.S. electricity production at 4.18 trillion kilowatt-hours in 2023. • About 43.1% of the electricity was generated by natural gas. • Nuclear power contributed to 18.6%, while coal had a 16.2% share. • Combined, Renewables accounted for a 21.4% share, including 10.2% from Wind, 5.7% from Hydro, and 3.9% from Solar. The price of a commodity is determined by its supply and demand. In the case of electricity, it is hard to store while its demand is highly unpredictable. New storage technology is limited by capacity and high cost. With Nat Gas being the biggest energy source, unforeseen changes in power demand could send shock waves into the market. Weather factors, in particular temperature, have the biggest impact in power demand. • In the summer months, the biggest power usage is for air conditioning cooling. Cooling Degree Day (CDD) is the number of days in a month where the average daily temperature is above 68 degrees Fahrenheit. • In the winter months, the biggest power usage is for heating home and offices. Heating Degree Day (HDD) is the number of days in a month where the average daily temperature is below 68 degrees Fahrenheit. Energy traders deploy CDD/HDD analysis and weather forecast models to predict temperature trends, electricity demand and the subsequent natural gas use. The Weather Shocks On December 29, 2024, the Weather Co. and Atmospheric G2 released a weather forecast for January showing colder than average temperature in the East, specifically from Florida to Maine as well as certain parts of the Great Lakes. In a separate report, AccuWeather meteorologists said that the colder air could trigger a winter storm with substantial snow and ice for a significant portion of the month’s first half. They added that the drop will begin in the middle and latter part of next week. When the futures market opened the next day, the price of Henry Hub futures surged 20%, hitting a new 52-week high of $4.20. Earlier in the winter, Germany experienced the so-called “Dunkelflaute” with no wind and a clouded sky. This is the worst scenario for wind and solar power. As Germany is heavily reliant on renewable energy, when the weather fails to cooperate, its power supply drops by half, sending electricity prices sky high. The huge supply gap prompted energy companies to turn on gas-fueled backup power plants, pushing the Dutch TTF ( NYMEX:TTF1! ) natural gas contracts to a record high. At the time of this writing, severe winter storms are sweeping across the Central Plains in the U.S., bringing heavy snow, sleet, and frozen rain from Kansas to Missouri, Illinois, Indiana, Kentucky, Ohio and Washington, D.C. Apart from the winter hazards, I expect higher power consumption to keep people warm from the below-average temperatures. Trading with Micro Henry Hub Futures Micro Henry Hub natural gas futures (MNG) offer smaller-sized versions of CME Group’s liquid benchmark Henry Hub futures (NG) contracts. The Micro futures have a contract size of 1,000 MMBtu, which is 1/10th of the standard contract. The Micro contracts allow traders to control a large contract value with a small amount of capital. With Friday settlement price of $3.354, each February contract (MNGG5) has a notional value of $3,354. Buying or selling one contract requires an initial margin of $366. Since its Monday high, Henry Hub prices have plunged 20%. Subsequent updated weather forecasts now predicted warmer trends for the Eastern US, which could curb heating demand for Nat Gas. Losses accelerated last Friday after the EIA reported that Nat Gas inventories for the week of December 27th fell -116 bcf, a smaller draw than expectations of -128 bcf. In my opinion, the draw was lower due to the reduced economic activity around the Christmas holiday. For the same token, we could see a smaller draw during the New Year. However, I consider this data seasonal outliners, rather than a longer-term trend. Global warming doesn’t necessarily mean warmer winters. Higher global temperature brings moisture from the ocean, with wetter atmosphere generating more extreme weather events. I expect winter temperature patterns to shift to much colder-than-normal, with cool anomalies poised to stick around key population centers deep into the winter. As we have seen in the past, unpredictable weather events could send large shocks to natural gas prices. With Micro Henry Hub contracts, traders could potentially realize sizable gains with a small capital requirement. Hypothetically, if the February prices move up 10% to $3.689 with lower temperature forecasts, the $0.3354 price gain would translate into $335.4 for a long futures position, given the contract size at 1,000 MMBtu. Using the initial margin of $366 as a cost base, the trade would produce a theoretical return of 99.6% (=335.4/366). The long futures position would lose money if Nat Gas prices continued to trend lower. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
NYMEX:NG1!Long
by JimHuangChicago
Natural Gas Trend Continuation LONGNot a market we trade super often, but there has obviously been a LOT of opportunity in natural gas as of late. After a long period of accumulation, NG has finally broken out to the upside. We are looking for potential trend continuation longs. Ideally, we would like to enter this trade around the ~3.00 level (roughly coincides with Anchored VWAP + support/resistance “flip zone”), but it may be a bit before NG trades back to those prices (if it does). However, shorter-term/more aggressive entries exist via demand zones circa 3.2. We’ve formed new/”fresh” 60-minute supply @ 3.346-3.380, so that is an upside target. One should drill down via smaller timeframes (30/20/15-minute), though, to see what additional supply zones form between ~3.2 and 3.346 – it’s likely other sell levels will exist within expanded range candlesticks formed earlier this morning (EST). Smaller timeframe supply zones + any resistance levels should serve as profit targets for longs; if you enter a trade with multiple contracts, you can always hold a runner and look for new highs if upside momentum is strong. Finally, keep in mind seasonality. We are doing a more thorough analysis here, but NG tends to catch a tailwind during colder months (vs. summer)... We’ll keep an eye on this market and will provide updates accordingly. As is always the case with trading, our approach/thesis could change as price action unfolds, so use your discretion when evaluating this idea. Questions/comments welcome! Jon @ LionHart Trading
RUS:NG1!Long
by JHartCharts
Natural Gas from Pipelines to PortfoliosNatural gas was once considered a byproduct of oil production. It is now becoming increasingly important as one of the cleanest burning fossil fuels and a key piece of the clean energy transition. Today, it forms the backbone of global energy production. This paper delves into the supply and demand factors affecting natural gas prices and proposes a long position in Henry Hub Natural Gas Futures (NG1!) to harness gains from seasonal price trends with an entry of 2.484 with a target of 3.099 and a stop loss at 2.172 delivering risk/reward ratio of 2x. Natural Gas Supply and Demand Supply Largest producers and exporters of Natural Gas are US, Russia, Iran, China, Canada, Qatar, Australia, Norway, and Saudi Arabia. The standout in the list is Russia. Following the conflict in Ukraine, gas exports from Russia plummeted 58% in 2022. This led to price shocks in EU natural gas (TTF). US supply is unable to adequately bridge this deficit as transporting natural gas using ships requires converting it to Liquified Natural Gas (LNG) and using special refrigerated vessels which is not economical for large quantities of natural gas. This is also why the spread between EU and US natural gas is much wider than EU and US oil. Notably, US shale reserves have a high concentration of natural gas. Along with newly developed fracking techniques, this has led to increasing gas production in the US. Moreover, natural gas is also obtained in the process of oil extraction, which means gas production is linked to oil production. This has interesting ramifications when looking at present supply. Despite low natural gas prices over the past few months, production in the US has remained high as a result of high oil production. Similarly, higher prices do not readily translate to higher production. This suggests that Natural Gas price-supply relationship is inelastic. Demand Demand for Natural Gas comes from: • Energy Production – Natural Gas is used in power plants to generate electricity. Natural Gas electricity production has been rising over the last decade as it replaces Coal. Notably, manufacturers using natural gas as an energy source can switch to other energy sources during price spike, which provides some elasticity to demand. • Commercial and Residential Heating – Natural Gas is used for heating homes in winter. This can lead to a seasonal demand during winter months in the Northern Hemisphere. • Industrial Use – Natural Gas is used as a raw material for industrial products such as plastics, ammonia, and methanol. Natural gas demand is heavily affected by weather. Unusually warm summers in the Northern Hemisphere drive higher energy usage from air conditioners while colder winters drive higher demand for heating. Inventories Gas can be injected into storage facilities and stored for later use. These inventory levels play a major role in balancing supply-demand. Summer months (April-October) are referred to as injection periods while winter months (November-March) are withdrawal periods. Inventory levels help even out the surge in winter demand. However, natural gas is much harder to store than oil as it is less dense. This means the inventory effect is not as apparent which explains the larger seasonal variation in natural gas prices as compared to oil prices. Seasonality in Natural Gas Prices Seasonal price action of Natural Gas shows two distinct price rallies. A large rally during winter in the US and EU driven by surge in supply for heating in winters, during this period, prices peak in early-December before declining. The other, smaller spike is during summers in the US and EU when demand for electricity rises, during this period, prices peak in early-June before declining. Further, prices show the highest deviation from the seasonal trend in late-September. Over the past five years, the winter rally has become wider, with prices staying elevated from August to early-December. Additionally, seasonal trend points to a price appreciation of +11% between September and December. However, investors should note that past seasonal trends are not representative of current or future market performance. Henry Hub Futures Henry Hub is the most prominent gas trading hub in the world. It is located at the intersection of major on-shore and off-shore production regions and connected by an extensive pipeline network. This is also where US natural gas exports are dispatched. CME’s benchmark Natural Gas futures (NG) deliver to Henry Hub and is the largest gas futures contract in the world. Other notable Natural Gas futures contracts are TTF (EU) and JKM (Asia). Futures from both regions are also available for trading on CME. Asset Managers are Bullish Commercial traders are heavily net short on Natural Gas futures, short positioning in July was at its highest level since 2021 but has since reduced. Overall, net short commercial positioning points to bullish sentiment. Asset managers have switched positioning in Natural Gas futures from net short to net long since May. Last week net long positioning reached its highest level since May 2022. Options markets OI points to a neutral market view on natural gas with Put/Call ratio close to 1. Options P/C has stayed close to 1 for the past 3 months. At the same time, Implied Volatility on Natural Gas options has been rising in August. A rally last week failed to break past a key support level but vols remain elevated suggesting that price may retest that level again. Henry Hub Gas Dynamics with European Gas Last week, EU Natural Gas futures (TTF1!) spiked by almost 28% due to a strike at Australia’s second largest LNG plant, still the rally soon retraced almost entirely. LNG supply disruption, especially at the key transition to the winter season can lead to volatility spikes. Though, EU gas inventories are 90% full, supply disruptions like this can still have a major effect on gas prices but especially on volatility. Over the past few years, higher flexibility and capacity in the global LNG supply chain has led to the various global natural gas benchmarks tracking each other more closely. This means that Henry Hub natural gas futures are exposed not just to US and Canada Natural Gas production but also to disruptions in global supply. However, the effect is comparatively limited due to ample supply in the US. This can be seen in the price action of Henry Hub natural gas futures which rose by 6% on the same day. Recent Trend in Natural Gas Inventories As per the EIA, Natural Gas supply fell 0.1% WoW last week. At the same time demand rose by 0.3% WoW. Note that working natural gas in underground storage has started to flatten over the past 4 weeks, rising by just 94 billion cubic feet (BCf) compared to the 5Y average increase of 140 BCf during the same period. Still, inventory levels are close to the top of their 5-year maximum, elevated by high US gas production during the summer driven by higher oil production. EIA forecasts that the depletion season will end with inventories 7% higher than their 5-year average. EIA expects production to remain flat for the remainder of the year, so watching weekly consumption reports could point to early indicators of seasonal inventory depletion. However, due to elevated inventory levels, the seasonal effect may not be as strong as prior years. In a longer-term trend, gas rigs in the US have started to decline this year after surging over the past year. This will likely lead to lower production over the next year. Trade Setup With options markets pointing bullish and seasonal trends suggesting price appreciation during this period, a long position in Natural Gas futures expiring in October (NGV) allows investors to benefit from an increase in Natural Gas prices. Each contract of CME Henry Hub Natural Gas Futures provide exposure to 10,000 MMBtu of Natural Gas while the October contract has maintenance margin of USD 5,070 for a long position. A USD 0.001 MMBtu change in quoted price per MMBtu leads to a PnL change of USD 10 in one Henry Hub Natural Gas Futures. Entry: 2.484 Target: 3.099 Stop Loss: 2.172 Profit at Target: USD 6,150 Loss at Stop: USD 3,120 Reward/Risk: 2x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
NYMEX:NG1!Long
by mintdotfinance
17
#NatGas Update #OOTTThe chart is non-tradable (though I did enter some cheeky shorts). Natgas is tracing out something really intricate, as is its typical behaviour. I suspect (and this is only specualation at this point) that the market is undergoing a compex [ w] [ x] [ y] correction as wave b where [ x] is a flat with an expanding diagonal in wave (C). Then there has to be either another flat or a triangle in wave [ Y] to complete wave b and proceed to a simple impulse c. That is extremely speculative at this moment, and hence not tradable from an ElliottWave perspective. The key points are - I believe the correction within the correction has not yet been completed. - Once wave b is completed, there may be a nice quick short setup followed by medium-term long opportunity This is not advise.
OANDA:NATGASUSD
by Fomenka
#NatGas #NG1! Update Natural Gas has followed my previous outlook by posting what seems to be a simple zigzag with ending diagonal in its final stages. From here we can expect a new wave up. Alternatively this correction can be complicated into ABC flat or WXY double zigzag. But tradingwise there is no reason to expect such further complication at this moment. I also expect oil rallying sharply and SP500 declining. May be we will see some hawkish remarks / developments sowing instability that sends energy prices up and stocks down. Speculation, of course. Not advice.
OANDA:NATGASUSD
by Fomenka
Natural Gas collapsing! Yet another deflationary signNatural gas in the US is collapsing. In part this has to do with LNG exports to the rest of the world being halted due to a fire to one of the export terminals. However in my honest opinion, there is more to it. It probably has to do more with the deflationary forces taking over, as high interest rates, money supply shrinking and inflation being too high, have destroyed demand to a very large extend. At the same time we are seeing progress in the energy space, with more projects and drilling taking place, as the ESG movement is taking a hit. The green movement needs to be sidetracked for a while, as we need cheap energy right now. Otherwise the war in Ukraine won't stop in Ukraine and we are gonna have famine in most of the world. So where would I be looking to buy natural gas? Or until what level would I be willing to short it? Based on an average I created which includes several futures contracts, I think that closing shorts at around 5$ is a good idea, yet buying a lot of NatGas with significant upside, I'd say start buying between 3-4$.
NYMEX:NG1!
by BitcoinMacro
1
#henryhub #naturalgas Double bottom. Spinning top reversal. BuyHenry Hub Natural Gas So we have a possible double bottom forming on natural gas. If price fell 8c more on the last low we would have a bullish divergence now. Throw in a spinning top reversal on the 2nd bottom, STO primed for an increase, weak volume and stronger RSI all things point to the sky. RSI: Relative Strength is 37 on the second low versus 25 on the first. Selling is a lot weaker this time around. STO: Stochastic has bottomed out and is ready for a jump. Volume: Has been dropping on this sell off confirming the weakness of this drop. Target 1: 7.00 (possible 34% return) Stop Loss: 4.60
NYMEX:NG1!Long
by thecryptochart
Update on US Henry Hub Natural Gas Prices – December 2022A cold weather snap forecast across much of the United States is driving demand for natural gas as a heating fuel higher. Prices of front month Henry Hub Natural Gas Futures have risen over the past week as a result. The front of the curve has moved more than the rest of the curve. The curve is now close to where it was two weeks ago. Natural gas in storage is within seasonally normal range. Since June 2022, when Freeport LNG Terminal had to shut down after a fire, natural gas storage in the US has been ramped up as the gas produced in the US can no longer be exported at the same volume as prior to the shut-down. Freeport LNG accounts for close to 20% of US export capacity. Its re-opening has been delayed many times and the latest guidance from Freeport is a partial opening in mid-December 2022 and full production in March 2023 . However, in an email statement to Reuters they have pushed the reopening to end-of-year , and we remain sceptical that there will be any flow of LNG from the terminal this side of the of the New Year. Ample storage could drive US natural gas prices lower when the cold weather snap passes. Europe has been able to fill its natural gas storage capacity to close to 90% coming into the start of the winter period (October 2022) and is now drawing on that capacity at a slower than expected rate due to thrifting and an initially milder-than-expected weather pattern. However, colder weather has arrived, which could drive higher demand. Natural gas flows to Europe from Russia have slowed to a trickle and hence the region is reliant on Liquified Natural Gas from elsewhere. Unfortunately, with Freeport LNG offline, the US will not participate fully in meeting this demand over the coming weeks, but US Henry Hub may get a boost when Freeport LNG opens. The European Union is currently trying to implement a price cap on imports. There is no final deal to speak of, but the European Commission’s proposal, is for a market correction mechanism that would kick in when the price of month-ahead contracts on the Dutch Title Transfer Facility exceeded €275 ($290) per megawatt hour and the gap between world prices was greater than €58 . Any success in approving this price cap, could limit upside for US Henry Hub used as feedstock for LNG exports to Europe. However, with the price gap between US and European natural gas prices being so wide (almost 6 times ), we believe the upside could nevertheless very large. Source: 1 FREE PORTING NEW ROUTER 2 Reuters 3 Bloomberg 13/12/2022 4 WisdomTree calculation on 13/12/2022 using Dutch TTF Gas 1st Line Financial Futures (USD/MMBTU) as published by ICE Endex who convert megawatt hour to Metric Million British Thermal Unit (MMBTU) and USD using the WM/Refinitiv Closing EURUSD Spot Rates as published by Refinitiv at 4 pm UK time and Henry Hub Front month futures.
NYMEX:NG1!
by aneekaguptaWTE
Natural gas: head and shoulders top pattern; $5 in sight?US natural gas prices have formed a head and shoulders top pattern, which may signal a weakening of the current major bullish trend and a subsequent reversal into a bearish one. The left shoulder coincided with the relative highs at the end of July at $9.30/MMbtu, a level that was then followed by a pullback to $7.53 (August 8) prior to the beginning of a new rally toward the head at nearly $10. The right shoulder was formed by the decline from $9.97 to $7.80, followed by a brief rebound at $9.22 and another decline to the current $7.86. Although a brief breakdown was seen in the September 19 session, natural gas is now testing the neckline of the head and shoulders pattern. If confirmed, we could see a return to the level of $5.30, which were hit in early July 2022. Additional bearish technical signals for the price of US natural gas include the MACD oscillator dipping below the zero line and the RSI slightly pointing south. Idea written by Piero Cingari, forex and commodity analyst at Capital.com
CAPITALCOM:NATURALGAS
by Capitalcom
1
EUR/USD analysis: US-EU natural gas gap narrowsRecent moves in the EUR/USD exchange rate have been driven primarily by the price differential between natural gas in the United States and Europe, rather than by the ECB's historic rate hike last week. Over the last 90 days, the correlation coefficient between EUR/USD and US-EU gas price differentials is 0.88, indicating a very strong relationship between the two variables. The price of gas in Europe has decreased drastically over the course of the past week, with the Dutch TTF benchmark falling by nearly 40% from its highs of €330/Mwh to its current level of €190/Mwh. This was aided by higher-than-expected EU gas storage levels at this time of year, as well as speculation in Europe about a natural gas price cap. When measured in dollars per million British thermal units ($/MMbtu), the European Dutch TTF is around $61/MMbtu right now, or about $53 more expensive than the US Henry Hub gas price, but significantly lower than the previous price-gap peak of $92/MMbtu. The narrowing Henry Hub-TTF price spread from $92/MMbtu to $53/MMbtu has helped the EUR/USD rally from 0.987 to 1.011. What next can we expect? This week, European nations are expected to announce long-awaited energy emergency measures aimed at lowering skyrocketing gas prices and alleviating the pressures associated with a complete Russian gas shutdown. If the market sees the announcements about energy policy as bad news for European gas prices (Dutch TTF), the spread between European and US gas prices may continue to narrow, which would sustain the euro in the short term. However, despite the fact that the price difference between European Dutch TTF and US Henry Hub gas has narrowed, European gas is still nearly eight times more expensive than US gas. This continues to be a significant drag on the European growth outlook, thus capping the euro's upside potential in the medium term. Idea written by Piero Cingari, forex and commodity analyst at Capital.com
by Capitalcom
2
What Would Happen to Henry Hub NG if China Attacks Taiwan?Since last week the media has published videos and Chinese politicians' statements about the Chinese military drills near Taiwan. Taiwan has also conducted military exercises and preparatory work with the civilian population in the event of an attack. On August 3, the NYT, quoting Chinese state media, published an article about the following Chinese military drills scheduled on August 4 and a place of exercises. Chinese media offered five swaths of the sea surrounding Taiwan. If true, it can be a hostile act, possibly igniting conflict between China and unrecognized Taiwan. Both countries are essential for the world economy, meaning the conflict would affect markets. I hope it will not happen . However, this risk urged me to start a series of posts ' What would happen to asset_name if China attacks Taiwan? ' A brief: China is the second economy in the world by nominal GDP. China is the main trading party for the US, Europe, and many other countries and regions. The country is also a giant gas consumer and LNG importer. According to the EIA, the US was the fourth LNG supplier in China in 2021. Henry Hub natural gas is a local benchmark. However, its price partly depends on the US LNG trade achievements and obstacles. In case of a conflict, it would halt LNG export to Taiwan. I estimate Henry Hub participants would also wait for sanctions on Chinese banks or even prohibition of gas trade with China. These would drive expectations of short-term oversupply in the US local market resulting in a sharp price drop of natural gas in America. In the end, some LNG exporters would change their export from China and Taiwan to other Asian countries, e.g., South Korea, Japan, and India. Other LNG sellers would divert shipments to Europe, suffering from high continent natural gas prices , bringing relief to Europe in terms of volumes and price. The main shock could happen later. Possible export and import prohibitions between China and the US with Allies would bring manufacturing decline, pushing gas demand lower and cutting its price. It would get a more sustained bearish effect on Henry Hub prices than temporary shipment redirection. With the technical analysis help, I estimate a first bearish move could put prices down to a support level of $6.4/MMBtu . Then, in case of sanctions, it would go down to the next support of $5.5/MMBtu . It is hard to forecast how long Taiwan can fight and what sanctions will be imposed. I doubt that sensitive restrictions would be imposed during the first days. I also doubt that the US will impose harsh O&G sanctions if China takes over Taiwan quickly. I expect it could happen a month after the start of the conflict. Breaking $5.5/MMBtu through, it would drop to the last winter's $4/MMBtu . Put options are the best instruments for shorting HH on the potential conflict. For the first target of $6.4/MMBtu , the option with the corresponding strike and expiration in September could suit well. For the following targets of $5.5/MMBtu and $4/MMBtu , I suppose corresponding strikes with October and November expiration. For futures traders, I guess a stop-loss is $8.5/MMBtu . The stop-loss is ugly and huge in today's Henry Hub Volatility environment. Timing for the trade matters much. I believe that options with an end-of-month expiration date could be good. The position holding period is 7 days to next Thursday. If the bad doesn't happen, it is better to close the long put or futures short position. However, we do not know the date. Solely China knows the exact date if the plan exists. The risk could realize during the next 7 days or be postponed to next month or even later. If the risk realizes later, I expect the same effect on the market, and only target adjustments could be needed. I wish you peace! Thank you for your reading, and have profitable trading! Comment your thoughts!
NYMEX:NG1!Short
by Nikita_Kalinin
1
Trade the Crude Oil and Natural Gas spread to limit price risk.Energy commodities are a volatile bunch. Amid a complex backdrop of the Russian-Ukraine conflict, a summer filled with heat waves and macroeconomic headlines, energy prices can swing in both directions quickly. From a risk management point of view, one way to maintain exposure in the energy market whilst limiting directional/market risk is to trade a spread between two energy commodities. We can measure the spread of the WTI Crude Oil (CL) vs Natural Gas (NG) by dividing the prices of CL1! / NG1! . This ratio/spread provides us with an overview of the long-term relationship between the two products. Over the past month, the pullback in WTI Crude Oil prices has presented an opportunity in the CL-NG spread. Generally, the spread exhibits a short/medium-term mean-reverting behavior and this behavior is premised on a few factors. 1) There is some level of substitutability between the two products as a form of fuel, therefore higher prices may drive consumers to use one over the other. 2) Most oil producers also produce natural gas, thus rising prices may incentivize them to drill for one product over the other. 3) Used as a form of relative value measurement for energy cost. When the spread trades at a high, we know that oil is likely trading rich relative to natural gas, and vice versa. Currently, the spread is sitting right above the 10.5 level which has acted as a resistance level since 2018, except for the oil price crash during the pandemic. Revisiting the past 3 times when this level was breached, a long CL and short NG strategy proved favorable as the spread rebounded. The average length taken for the spread to reach the high is 3-5 months. Should this relationship hold, we can long the spread by buying 1 WTI Crude Oil Sep 2022 future contract (CLU2022) and shorting 1 Henry Hub Natural Gas Sep 2022 future contract (NGU2022). However, do note that the contract value of the CL futures is ~ $97,000 while that of the NG futures is ~$80,000, so there is some exposure that is not fully hedged. Spread Entry at 12.30, stops at 10.50. Targets at 17.80. Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Reference: www.cmegroup.com
NYMEX:CL1!Long
by inspirante
1
US Crude Oil overlay with Henry Hub Nat Gas - Log scaleI've been having a bit of a time trying to make sense out of the Nat Gas price action. This overlay with US Crude provides some context TVC:USOIL NYMEX:NG1! Having set both NG and USOIL to log scale and relating them back to the origin of NG1 in 1990, a pattern emerges. NG can be seen to have more extreme reactions to similar geopolitical input to USOIL. Now, one can expect with a reasonable degree of certainty that there will be a common causality between the two commodities. No chart can completely demistify the oil and gas relationship, nor predict future outcomes with a fine granularity. That said, comparisons can be drawn to previous decades and relationships extrapolated to attempt to determine direction and amplitude. Previous peaks suggest that a significant downturn could be within the realm of possibility. What degree of probability and timeframe is yet to be seen on this chart, but history often rhymes. This is not investment advice. I am not your investment advisor. All analysis for entertainment purposes only. Please seek advice from licenced investment professionals before you choose to invest in any stock, bond, commodity, REIT, derivative, future, or other risk on asset.
TVC:USOILShort
by MarketFund2k