Oil vs Gas Trade Idea

[Jurassic]

Rocky day for natural gas yesterday which leads to this article https://www.cnbc.com/2018/11/14/mark-fisher-says-the-worst-is-over-in-crude-oil-and-its-time-to-buy.html. .



I was wondering whether anyone could enlighten me as to how the oil vs gas trade is set up? Is it looking take advantage of mean reversion or differences in roll downs?



[img]https://ei.marketwatch.com/Multimedia/2018/11/14/Photos/MG/MW-GY503_nat_oi_20181114085155_MG.png[/img]

[goldorak]

Nat Gas... you remind me it all happened more than 10 years ago.



For the culture of the youngest hanging around here.

Amaranth - Brian Hunter

[Azx]

I would guess that the trade has been based on positive momentum for crude oil and steep contango for natural gas.



Yesterdays situation in NG strikes me as very similar to the VX spike in February. Two leveraged ETNs with about $3B in net exposure would be a lot of contracts that had to be bought to rebalance within a day.

[ronin]

There is no oil vs gas trade. There isn't even a good gas vs gas trade.



Energy spreads that people trade tend to be vertical rather than horizontal. Fuel oil to Brent, unleaded gasoline to WTI, power to gas, power to coal etc.



The only meaningful horizontal is spreads between various crude oils. But the reason why that works is because there is one benchmark crude, and everything else is priced in reference to the benchmark.

[Jurassic]

[deleted]

[Jurassic]

https://www.themacrotourist.com/posts/2018/11/13/chipper/



@ronin so you are suggesting this oil vs gas is by chance

[TonyC]

one is occasionally faced with a choice twixt laying off a 6oil spark vs a gas spark whilst hedging off forward production across your generation fleet ... (i.e. when the spark on one's 6oil fired plant is the same as the spark on one's gas turbine)



say you put on the 6 oil spark, (buy spot 6 oil, put it in a tank, and sell Forward electricity)



you're hoping that spot 6 oil inverts relative to forward 6 oil and you'll make money on your tank, and/or you're hoping that gas will fall relative to 6 oil and you unwind your six oil spark and replace it with a natty gas spark.



you can win two ways, (i.e. monatize your fuel switch option) and one of those ways is the forward six oil versus forward natty gas spread.



but hedge funds or speculators typically don't do oil vs natty, 'cuz they typically don't own a generation fleet, or tankage.

[ronin]

@jurassic,



What @tonyc said. Especially if you can work out the twix reference.



As for your blog post, I wouldn't get overexcited by stuff like that.



I did have a quick look at the numbers, and they don't tell the same story as the blog post. Something happened with natgas, and prices and volumes spiked on the 13th/14th, both futures and options. But WTI didn't do anything extraordinary, either in terms of price or volume.

[EspressoLover]

The energy market's littered with the corpses of plucky traders who dived headfirst into some historically aberrant spread divergence, only to watch their portfolios wiped out as the spread diverged even further. WTI vs. Brent, diesel vs. gasoline, Henry Hub vs. nat gas basis, gas vs. power, corn vs. ethanol, crude prices vs. energy sector valuations, pretty much anything Enron did ever, etc.



You can't really treat energy spreads as a statistical black box because of the high risk of sudden regime change. If you throw a pairs trade on between MCD and BKC, it's pretty unlikely that Burger King is going to suddenly decide to completely change over to a cloud computing business. Your biggest risk is maybe M&A, but on a single name basis that's a pretty low, easily diversifiable risk.



With energy you have all these relatively close substitutes on top of rigid inelasticities. It's easy for some small shift in supply or demand to all of a sudden invert the economics on some part of the complex. The spread looks stable, stable, stable, then boom there's a violent phase change.

[Jurassic]

@EspressoLover tres interesting