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Five Thousand Over Libor
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Energy trader with 11 years of experience in Natural Gas and Interest Rate markets. Manage a small trading organization, in the $25-50 million asset range, responsible for both consumption/production hedging and proprietary strategies.
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  • EIA Storage Ideas For Gas Week Apr 19, 2012

    Salt-cavern scrapes this week were quite bullish weather-adjusted and are driving market expectations for quite a low Producing Region (PR), and overall national, build.

    Looking at salt scrapes in the PR over the past 3-4 years, gas week 4/19/12 was very tight against our PR temperature proxy - gas week 4/19 is the red boxes on this PR salt scrape/PR temp proxy scatter. So tight was 4/19 in the salt caverns, that the only scatter-plot neighbors gas week 4/19 found on this scatter, exactly every single one, were from Oct 2009. Back when salt caverns were struggling to keep from full and we were in congestion city in the Producing Region.

    (click to enlarge)

    Back then the prompt future - cash spot spread looked like this. Oct 2009 in the yellow circle.

    (click to enlarge)

    So - salt caverns are rejecting gas owing to spacing issues - e.g. Egan is some 92% full against 46% full this time last year, reflective of the vast majority of Producing-Region salt caverns. But we didn't get a cash signature in this past gas week that signaled the rejected gas being forced onto the market, as we did in Oct 2009.

    So, one of two things happened

    1. We very conveniently found the demand to clear the salt cavern rejections, all in a week with the some of the lowest notional producing-region demand this year. Dallas averaged 69F for 7-days through gas week 4/19, Houston 73.
    2. Or, non-visible intrastate storage assets injected, like Clear Lake, which is pretty likely the only storage asset in the US Gas Economy with a huge YoY deficit.

    I think we've got good risk for a Producing Region bearish surprise. I'm 37/7/4 East/Producing/West for a +48 Bcf Total.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 25 7:01 PM | Link | Comment!
  • Chesapeake’s Dry Gas Hedging is Now One Giant Short Put on Gas Prices

    So, let’s see if we’re reading this correctly, from CHK's Q3 release...

    “At November 3, 2011, the company does not have any open natural gas swaps in place.”

    Followed with...

    “The company currently has the following natural gas written call options in place for 2011 through 2020:” where they detail 16% and 40% of expected production sold in call volumes for 2012 and 2013, respectively. 

    Anyone with a sophomoric understanding of option trading knows that holding underlier length against short calls nets into a short put. 

    By selling calls against production, you rent out your upside for a one-off rent payment and maintain 100% of your downside price risk.  The former not nearly as worrisome as the latter, given their average strike in 2012 and 2013 of about $6.50. 

    This strategy works well in a steady-price environment, is less-than-pleasing in a steadily-rising price environment, and is damn near disastrous in a falling-price environment.  Generally speaking, a short-call production hedging strategy has all of the costs of swap-hedging (missing participation in price increases above the call strikes) with none of the benefits of swap-hedging (locking in prices in a falling environment) with the singular, one-off unique benefit of collecting premium.  

    Producers of anything, gas, oil, corn, wheat, lobster tails, do not effectively hedge by morphing their net position into a short-put structure.  Proper production-hedging seeks the transfer from company to market of downside pricing risks.  Net short put structures are actually best reserved for the hedging of consumption.

    The best that can happen here is gas prices rise right to CHK's strikes and McClendon gets to bark about “extracting value” via premium collection.  If gas prices fall, CHK has full exposure to that on their dry-gas production, which remained 69% of realized revenues for CHK in Q3.

    Perhaps dry-gas production is an afterthought for McClendon and company now; this ill-advised hedging structure certainly suggests it is.  That is, an afterthought, until it’s not, because if gas prices continue to fall – and we’re a warm-November and December away from that – it won’t be.  If dry-gas prices plunge, this could be the biggest bet CHK has ever made. 

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I have never traded CHK, long or short and have no intentions to.
    Nov 04 2:57 PM | Link | Comment!
  • The Earth has a Circumference; Please let Keynesianism Finally Die.

    On any given summer afternoon, in several instances along the tens-of-thousands of miles of oceanic shoreline that help to define the beauty of this country, you can find an 8 year old with a trident commanding the tides to his liking.  Dash away, dash away and then come hither tides.  His lack of empirical control no match for the power of his imagination. 

    It was difficult, then, two Wednesdays ago, to differentiate the action of the FOMC to this nation’s Neptune Auxiliary.

    Quantitative Easing 2, in and of itself, has exactly no chance of working.  The psyche of the commercial decision maker cannot be favorably distorted by the mirage; that’s why, in aggregate, they’re a successful commercial decision maker, they’ve thus far properly encountered mirages: on net, avoiding them.  You are one of two things in this economy: a saver or a borrower.  A saver engages the market until his risk aversions (forever present but out of the forefront until they aren’t) exceed his estimates for current return.  A borrower engages the markets until he can either no longer find opportunities that promise returns higher than their cost or can no longer convince others of his ability to successfully service a loan (all 3 of these things highly deflationary and currently quite evident). 

    Effortlessly adding a couple of zeros to the end of prime-dealers’ and big banks’ reserve accounts at the Fed, which are already fantastically-historically high (i.e. blowing previous records by multiples in the thousands), does exactly nothing to change this.  Pursuing the stoking of “animal spirits” is identical to seeding clouds.  Identical.  It shares several attributes with the infamous efforts in Salem, Massachusetts in 1692. 

    There is one element in every one of our lives and the lives of everyone that has ever lived, that has had a dominatingly perfect win-loss record.  Mother Nature.  Mother Nature always wins.  Always.  Attempting to circumnavigate her is categorically ill-fated.  You will lose.  This is why socialism is 0-X in history.  This is why every single piece of legislation has some element of unintended consequence. 

    Attempting to fully shape the consequences of the business cycle is the apogee of fool-hardiness.  We’re learning that now, as we encounter the brutal residuals of decades of active central banking.  Shakespearian then that we are setting new frontiers of audacity in attempting to fly the wingless plane that is active central banking.  This isn’t to say rigorous observation and the scientific understanding of the economy isn’t without distinct merit, it most certainly is.  But taking that understanding and using it to piss into the wind seems difficult to equally qualify. 

    You cannot control tides.  You cannot make horses drink.  You cannot usurp mother nature.  The world is round and Keynesianism is nothing more than ostensibly well-meaning adults nursing the fantasies often reserved for 8 year olds. 

    It is not better "to do something in the face of nothing", its best to allow consequence to roll as unimpeeded as possible to the original decision makers, send its signal (which is what its supposed to do), produce its lesson, and clear the market.  It's best to grow up. 

    Disclosure: No Positions in Tickers Tagged
    Nov 14 12:22 PM | Link | Comment!
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