BWS Blog


Using Options And Spreads To Profit From Natural Gas Trading

Thursday, July 22, 2021 at 2:02PM


Natural gas prices , as the reader is very likely aware of, have been on quite a tear in the last couple of months, reaching their highest levels since the Fall 2018 rally, having broken out of the recent "consolidation" range this week, sending the prompt month August contract closer to the $4.00 level.

natural gas commodity weather

The move higher has led to an increase in day-to-day volatility, and some rather wide daily trading ranges over the last month.

natural gas commodity weather

When playing flat price, i.e. being outright "long" or "short", profits can be significant if the trader is able to capture the right move, but risk of loss is also significant when prices are moving around in wider ranges. One way to mitigate risk is through the use of options and spreads. In our Wednesday Seasonal Trader Report, available for all Trader level subscribers, we provide the trader with some strategies that, assuming our read on weather and fundamentals is correct, can secure a profit with less risk involved compared to an outright position. As an example, this is from our report last week:

natural gas commodity weather

All of these strategies were skewed in the bullish direction, but by using options and spreads, one can limit the risk involved, and in some cases, such as with covered calls, can still turn in a profit even if flat price moves somewhat against the prevailing view. In this case, all four trade ideas proposed are in the money.

We, of course, cannot give a full crash course on options and spreads here in this blog, but do think these strategies may be useful as a part of any active trader's portfolio. As mentioned above, we offer strategies each week for Trader level subscribers as a supplement to our weather and fundamentals analysis, giving the reader something actionable. We invite you to sign up for a 10-day FREE trial here to take a closer look at this, as well as our entire suite of products designed to keep natural gas traders a step ahead of changing market conditions.




Cooler Forecasts Place This Month On Pace To Be The 'Coolest' July Since 2015

Wednesday, July 14, 2021 at 4:41PM


After one of the hottest Junes in the historical record, the month of July has, so far, been a dud in most locations that matter to the natural gas market.

natural gas commodity weather

Over the last few days, cooler changes to the forecast have continued, as models have been guilty of overplaying the return of any heat into the key areas of the Midwest and East in the medium range. This has driven our projected July Gas-Weighted Degree Day (GWDD) total well under the recent 5 and 10-year average, marking what would be the coolest (if one wishes to use such a term in summer) July since 2015.

natural gas commodity weather

Now, it is true that the 5 and 10-year average is setting the bar high, as we have had numerous hot summers in the last 10 to 15 years, but, given that analysis in the natural gas market typically involves using the 5 or 10-year average as a baseline, it is a very relevant measuring stick to use.

The upcoming pattern, while not yet hot in places that matter most, is definitely not as cool as the opening of the month has been.

natural gas commodity weather

In terms of GWDDs, here is the projection from the GEFS and ECMWF EPS:

natural gas commodity weather

We would toss the GEFS here, which is notably hotter than its ECMWF counterpart, but has been biased way too hot in recent weeks, even when the pattern has verified hotter. Still, this means the upcoming 15-day period is closer to the 5-year average than we have been, so it does represent a hotter step change. Ideally, however, we would like to see more 90s into the Midwest and East in order to get the weather component more solidly into the "bullish" bucket again, something that, for now, is lacking in the forecast, at least until late month.

natural gas commodity weather

With the natural gas storage situation much more "interesting" (as our last two blog posts have highlighted), weather will play an increasingly important role as we move forward, especially once we are closer to the cold season. Our daily reports provide a very affordable way to keep on top of relevant changes, and how those changes will shape natural gas prices. Sign up for a 10-day FREE trial here in order to take a closer look at our suite of products.




Does Natural Gas Truly Have A Supply Problem? (Part 2)

Friday, July 09, 2021 at 12:36PM


In our previous blog post, we looked at the supply / demand situation in the natural gas market in order to assess the risk of heading into the upcoming winter with storage levels that could prove to be inadequate in the event of a colder winter. We will take another look here, as we have had a couple of EIA reports to digest since that post. Last week's report showed a build of 76 bcf for the prior week, not as tight, supply / demand balance wise, but not inherently bearish. Then, we were hit with another big bullish surprise in yesterday's report, showing a build of just 16 bcf for last week.

natural gas commodity weather

This was well under our estimate, and below just about every market estimate we saw heading into the report. Now, there were a couple of issues that combined to strengthen this report, namely, lower production last week, and very low wind generation, but even with those in mind, it was a strong number, and prices have responded by rising roughly 10 cents since the report.

natural gas commodity weather

These are, of course, the highest prompt month prices we have seen at this time of year since 2014, yet the higher prices have, so far, done nothing to weaken the supply / demand balance, as one would typically expect to see. The following chart shows recent injections compared to the same weeks in 2018 to 2020. Notice this year's trend line remains well under the prior three years, indicating that, weather adjusted, injections continue to be significantly smaller this year, which is remarkable given the gains in flat price.

natural gas commodity weather

On average, per this chart, we are injecting roughly 3 bcf / day less than the 2018 to 2020 average, weather adjusted, over the last few weeks. Some simple math reveals that such a pace, should it continue, would lead to end-of-season storage levels around 3,230 bcf, easily lower than what the market would be comfortable with. Even loosening the balance to match the prior three years would only get storage to just over 3,600 bcf, still the lowest end-of-injection-season level in the last several years, outside of 2018.

Where would such loosening come from? It all still hinges mostly on production, in our view. We still have yet to see any material gains since late February, when averaged out.

natural gas commodity weather

Now, we do typically see production increases from July through the start of winter. As such, we can use the prior three years as a sort of "measuring stick". The following chart shows that, on average, we have gained roughly 4 bcf / day in production from now through the end of November in the last three years.

natural gas commodity weather

With LNG exports likely staying "maxed out", or close to it, given the natural gas situation globally, and Mexican exports elevated vs prior years, production needs to make similar gains this year. If that does not occur, any cold this winter would make things very, very interesting.

Speaking of weather, continued anomalous heat the rest of summer would further exacerbate the need for more supply to keep storage levels in check, though forecasts have cooled somewhat, recently, as the projected total for Gas-Weighted Degree Days (GWDDs) for July as a whole has slipped a little under the 5-year average.

natural gas commodity weather

That is not "wildly bearish" by any means, especially since it has come with lower wind generation, but has moved weather to more or less a "neutral" factor, for now.

With the recent increase in market volatility, as traders ponder storage risks as we move forward, constant monitoring of data is even more important, and weather forecasts heading into winter may be more critical this year than in any we have seen for a long time. If you are an active trader, we have all the tools and analysis you need, from weather to fundamentals, at a very affordable cost, to keep you in-tune and ready to capitalize on market moves. Sign up for a 10-day FREE trial here to take a look at all of the products we have to offer to keep you ahead of the natural gas market.