Friday, December 21, 2018

A Cautionary Tale For Would-Be Natural Gas Funds

This stuff can kill you.
In early November there was a seismic event in natural gas prices when the pressures acting on the market revealed that what appeared to be a placid sideways trending market was actually under extreme dynamic tension, such that when the forces became even slightly unbalanced the result was akin to tectonic plates ripping loose and releasing that tension with almost explosive force.

And all hell broke loose:

The exchange correctly saw the action as so destabilizing as to be an existential threat to the market.:
Nov. 15
"Shocking Nat Gas Price Swings Prompt 'Emergency Action' By CME" 
Here's Slope of Hope with more, he charts the United States Natural Gas Fund LP which holds front month futures::

The Book of James
(20, Dec 2018 7:18:48 AM)
What a difference a single month can make. Observe the chart of the natural gas market below. Once it pushed past resistance (pink horizontal line) it went roaring higher, devastating – – notably – – James Cordier and his fund, purportedly to the tune of $200 million. And then, equally as fast, all the gains disappeared. It’s as if nothing happened.

Looking at the Volatility chart (thank you, SlopeCharts……….) provides a more specific view as to why a short position in these naked options would be such a wipeout. And, again, the explosive move in price has pretty much vanished.

The chilling thing is that if you are James Cordier and decide to Google yourself, what appears as the very top results are advertisements from lawyers.

Our introduction to that November post:

Two quick points on the post below.

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.

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?...
Yesterday the December futures top-ticked at 4.929, close to the 5.00 wild-ass guess.
Today's settle 3.901 -0.936.

We didn't know what the specifics were but something was up.
When your Spidey sense gets going, so should you.

This stuff can kill you.

Or as an old pro once told me: "He who fights and runs away, lives to run away another day."
Or something

Also, writing naked calls is a strategy that is the poster child for "picking up nickles in front of a steamroller."