Natural Gas

Good to know: the UNG ETF is not the best way to play the eventual price rebound in natural gas. There is some serious contango in the market (so much so that the current price of $2.73 for Oct is just under 60% of the Dec contract at $4.69). Prior to current month expiry, the UNG ETF “rolls” the contract to the next month. When this roll takes place, they sell the current month at say $2.73 and buy the next month at $3.89 (current price of Nov). When they do this the price of UNG does not change as it ends up buying a higher priced contract for which to trade around (they try and match the percentages of the change in price). Effectively, your cost base gets eaten away by the contango and you lose out on the current contract price. The only way it makes sense to buy an ETF like this is when there is backwardation in the market of the underlying commodity.

Natural Gas is poised for a huge move...

Sphere: Related Content

El Nino

On August 19 the World Meteorological Organization said the El Nino phenomenon — currently causing havoc in soft commodity prices but which generally has a dampening effect on natural gas prices as it brings warmer weather in the winter — might actually turn out to be weaker than first expected.

Here’s the Reuters report for your consideration:

GENEVA, Aug 19 (Reuters) - An El Nino building up in the Pacific looks like being only a mild version of the phenomenon that has in the past brought devastation around the globe, the United Nations weather agency WMO said on Wednesday. But the World Meteorological Organisation warned that even a weak El Nino — a phenomenon in which changing sea temperatures in the Pacific Ocean affect weather around the world — could seriously disturb normal climate patterns in many regions, bringing drought to some places and heavy storms to others.

“What appears to be emerging is a weak to moderate El Nino, but one that will continue for the rest of this year and stretch into the first quarter of 2010,” senior WMO climate scientist Rupa Kumar Kolli told a news conference.He said the new El Nino would have nothing like the strength of the 1997-98 version — the worst on record — which produced extreme weather that wreaked death and destruction across the southern hemisphere and parts of the north.

That El Nino brought huge storms which battered western coasts and towns in Latin America, killing hundreds of people there and elsewhere around the globe and causing billions of dollars of damage in Asia and Australia.Both developing countries and richer nations have been anxiously watching the new event in the Pacific, fearing that even minor changes in weather patterns could seriously damage economies already battered by the global recession.

Kolli was presenting a WMO situation report and outlook for the alternating and linked El Nino/La Nina events in which sea surface temperatures in the Pacific, the world’s largest ocean, either climb above average or drop below it.

Kolli did not say how El Nino would affect any particular region.

Sphere: Related Content

Love Boat

On the site Infectious Greed we found the following:

There is a kind of oceanic traffic jam out there among very large crude carriers (VLCCs), with something like 7% (according to Lloyd's) of them storing crude oil off the coast of Europe, Asia, or North America in anticipation of higher prices later this year. Such are the joys of contango -- higher forward prices making it profitable to store petroleum for future sale -- but it is a huge gamble. If the people contracting for such VLCCs are wrong, their carrying costs mount and it becomes likely that they just dumb the product on the markets, further depressing prices.

Check the following figure (from EA Gibson) of the current storage situation for both petroleum and clean products, like gasoil:. While crude sea storage has declined from its peak earlier this year, clean products are floating out there is ever larger amounts.

Sphere: Related Content

Many voices... one tune

Now consider this: most physical intermediaries are focused on hedging via the energy markets. They’re not in the business of trading oil equities and interest-rate products. That’s not necessarily the case for hedge funds and investment banks active in the commodities space. With clever algorithms at their disposal there’s no reason why they can’t outwit the physical intermediaries with what they know more about, especially with a latency advantage. Areas they know more about, that is, like equities and bonds.
This becomes increasingly tempting with so many commodity ETFs trading on “high frequency” friendly platforms like the NYSE Arca. The key here is detecting the arbs between the underlying price of the commodities and the actual trading price of the units. Then there’s the arbitrage with the interest-rate and Treasury markets. In the days of floor trading, simultaneously buying oil and selling Treasuries if a mis-pricing in inflation expectations opened up would be possible but not half as fluid. Algorithms can completely automate that process.
Is it any surprise then that oil is showing such an increased correlation with the dollar and equities?

Sphere: Related Content

Painting the tape

I feel good.
Especially when I see this kind of action in the S&P500 future. This picture is from yesterday and depicts the last 90 minutes of the sessions, when all the shorts had to cover their positions once the Big Boys step in and the index goes up, up and away.

But of course, this is tape painting, the real action remains bearish. Look the stock price of the Inter Continental Exchange (ticker: ICE). Why an exchange? They were the canary in the coalmine last autumn.
But of course, more is going on.
Reuters says:
· The top regulator of U.S. futures markets is considering a clampdown on excessive speculation in energy and commodity trading by restricting holdings of big players, part of a broader move by the Obama administration to stabilize the financial markets.
· William Blair and Co said in a research note that the stocks sank on fears of CFTC imposing restrictions on futures trading, noting that energy futures comprised up to a quarter of revenue for each of the exchanges.

And then this: the CFTC also eyes ETFs such as the Unites States Oil Fund (ticker: USO) and the United States Natural Gas Fund (ticker: UNG) as these ETFs have become so big that at one point USO held more than 20% of NYMEX front-month oil futures contracts. Sphere: Related Content