1) Both ZH and Macro Tourist have written about the natural gas/oil ratio and I frankly don't know what they are talking about. Except for both commodities being hydrocarbons and often times being found in the same field the two are not fungible. They don't make a rational hedge, dirty or otherwise or even a pair trade much less an arbitrage. It seems similar to the folks who talked about a correlation between solar stocks and oil. Huh? Unless you are burning oil to produce electricity—and I don't think anyone does anymore—there is no end user substitution effect and thus no connection between the two markets.
Both oil and gas can be traded at the same shop but there is no reason to think the positions are linked.
2) I explained why we weren't saying much about natty a few weeks ago:
We haven't been posting on U.S. natural gas futures because, at least as far as blogging goes, it has been untradeable. It might be doable if the blog was posted in machine-readable format and delivered via ultra-high-speed microwave relays with ultra low latency. Maybe.
So instead we've been focusing on second and third derivative stuff like freight rates or shipping company stocks when what the world is craving is highly leveraged (accurate) directional bets.
Or something.
Look at this:
The amount of natural gas in storage is not only lower than the 5-year average, it's been setting new five-year, year-on-year, lows. You would think the futures would be at least $5.00. Instead:
They can't seem to get much above $3.25.Yesterday the December futures top-ticked at 4.929, close to the 5.00 wild-ass guess.
There is a lot of gas around, in the U.S., unconventional (shale) supplies have gone from 5% to 40% of total production in just over a decade, the last of the Australian mega-projects just started delivering this week and Russia's Yamal gas is ramping up fast but still....$3.25?...
Today's settle 3.901 -0.936.
From ZeroHedge:
Yesterday's furious short squeeze in natural gas has seen an equal and opposite sell off today, with Natgas now unchanged from before yesterday's sharp ramp that sent the front contract higher by 20% only to see a 15% drop today.
In addition to pairing [sic?] of positions, Thursday’s decline was likely exacerbated by a report showing that producers had injected 39 billion cubic feet of gas into underground storage last week, higher than consensus estimates, bringing total stocks to 3.247tn cu ft. Still, stocks remained at the lowest level for this time of year since 2005, leaving the market vulnerable to fears about a weather-induced shortfall.
While the catalyst behind the furious spike has yet to be confirmed, the severity of the price action prompted analysts and traders to speculate if one or more hedge funds were liquidating positions during a frantic week in global energy markets that saw gains for gas as crude oil prices took a dive.
As we noted yesterday, the recent turmoil in the two commodities was likely due to a massive bearish positions in gas offset by longs in crude oil and "the unwinding of positions in one of these two commodities could potentially have triggered the opposite effect on the other commodity," Citigroup said.
Indeed, as shown in the chart below, the 2-week rate of change in natgas vs WTI was the highest going back nearly 15 years.
And as Bloomberg reported, for nat gas traders, Wednesday's price rally was so extreme that some were left comparing it to the turmoil that followed the notorious Amaranth blow-up 12 years ago. Gas futures rocketed up as much as 20 percent while there was an even bigger surge in the so-called widowmaker spread between two longer-dated contracts -- in effect a play on how big stockpiles will be at the end of winter. It’s the dramatic move in the spread that’s leading observers to draw parallels with the 2006 implosion of hedge fund Amaranth Advisors, which lost $6.6 billion following wrong-way nat gas trades by Brian Hunter. While so far there’s no suggestion of losses of that magnitude this time around, the gyrations set commodities markets abuzz....MORE
Whatever the reason behind the trade unwind, the CME took what it called "emergency action" to widen price fluctuation limits for eight nat gas futures contracts “in light of recent natural gas price movements."...
Here's our link to the Macro Tourist on Wednesday:
Was A Large Energy Fund Just Crushed?
The last two weeks action From FinViz:
And if interested the last big natural gas fund self-immolation:
The man who lost $6 billion (Brian Hunter, Amaranth)
