» » Valor View – NG – Natural gas bounces back

Valor View – NG – Natural gas bounces back

  • Natural gas went down along with oil and equities on Friday and early morning today
  • Vol jumped to new highs at the beginning of the day as it seemed at one point that natural gas prices might fall below $1.50 today
  • Corona virus is bearish natural gas demand but the mayhem in oil and equities could be viewed as bullish natural gas as we discuss below
Intraday vol
  • At $30 oil, there is an expectation that oil production will decline by upwards of 2mmbpd by year end. Associated gas production will get impacted downward along with it
  • There have been reports that just to maintain current levels, 30bcfd+ of new natural gas production is required every year. At current strip prices and lack of capital in the market, the natural declines may lead to significant production declines by year end
  • This view was quickly absorbed by the market as at one point April price was back to unch and Q1'21 was up 5+ cents
  • Q1 skew and vol has been acting bullish for quite a while and prices & spreads tried to catch up to it, today
  • Even if we disregard these fundamentals for a bit, when the margin clerks come calling, one has to liquidate everything and anything they can. The spec market is LONG oil and SHORT natural gas. As funds continue to liquidate their positions, It would not be too far fetched to see natural gas going up and oil getting hammered further. We saw this in late 2018 when the long oil/short gas strategies got into trouble and may see a repeat now.
CL vs NG
CL vs NG Q4'18
  • Most of natural gas equities are in distress and some of them may go through restructuring
  • We are seeing possible signs of some of that restructuring already happening privately. Some of the market flow appears to be reversal of Cal21 and 22 hedges in both Crude oil and natural gas
  • During this restructuring, if the hedges go away they have to be bought back in the market, which could further put some upward pressure on futures prices and options
NG equities
  • Continuing with the Friday trend of big bullish trades when 10k+ Oct 2.5/3.00 call spreads were bought, today we saw 5k+ Oct/Jan -0.25 calls trading
  • The first part of the rally has been back led and it is imitating 2016 to a T, as we discussed in a previous report.
  • If the rally continues and the short specs cover, the next leg could be front led, squeezing the spreads in as indicated by the above Oct/Jan -0.25 call Calendar Spread Option
Top Trades 03/09
  • Skew shows interest in buying puts similar to oil and equities and selling of the calls in the front
  • This would make sense with the expectation that vol would get hit on a move up and gets bid on a move down
  • We would advise not being too cute with selling front calls though, as the upward moves could be big as well and gamma will overwhelm the vega gains (if any)
  • For Q1 upside, we like flys for a patient trade, calls for a sharp rally and call spreads for somewhere in between
  • Feel free to contact us if you want to discuss it further or want to try out our Options Trade Scanner to scan for trades that fit your view
Skew and vol changes