Can You Corner a Market by Shorting it?

[Zhong Lu + 845]

1.  I look at Henry Hub, which is primarily for domestic production.  Exports do matter, but it's not a big deal.  I understand there's a glut in Asia, which is why prices are dropping there, but Henry Hub prices are ALREADY below 1.8/ break even point of producers.

2.  Prices were dropping well before corona virus.

3.  Why aren't the shorts covering? We're at over 8 billion dollars short on natural gas, which is historical levels while storage and production/deficit is at average.  Also, everyone knows producers CAN'T survive at current prices.  And yet price continues to drop day after day after day.  From an economic stand point this makes no sense.  From a trading perspective this makes little sense either because who the hell shorts into a market that's over-saturated with shorts, and a commodity whose prices are already below break even for producers? 

There are no more bulls to sell into this market.  The only reason prices are going down is because new bears are shorting it.  I'm getting pissed off because this isn't making any sense.  I reckon the lower it goes, the more money I can make on it, eventually, when I bottom feed, but still this pisses me off.  

Edited February 11, 2020 by Zhong Lu

[Zhong Lu + 845]

If I was any more paranoid, I'd think someone's manipulating the natural gas market so they can buy producers on the cheap.  Then run the price back up and make a fortune or something.  In the meantime, hire a bunch of people to post "oversupply, oversupply, oversupply" everywhere online and brainwash others into believing it (despite the fact that there IS no oversupply according to inventory reports).  

I mean, if there's more supply then demand (the definition of oversupply) shouldn't inventory levels be RISING or HIGH compared to the 5 year average? People are making excuses, trying to find reason to justify their beliefs, but at the end of the day it's INVENTORY levels that determine if there's an oversupply or not and the inventory levels simply don't show it.  This is basic economics/Common Sense 101 (if there's too much supply of a product, the supply will be put into inventory, and inventory levels will rise. Blah blah blah).  Doesn't mean I'll go long on natural gas (yet) because I don't get in front of moving trains, especially when I don't understand what's going on, but still this oversupply argument is shit. Utter shit.  

Edited February 11, 2020 by Zhong Lu

[Geoff Guenther + 317]

Does anyone remember when Brian Hunter took down Amaranth Advisors by losing $6 billion in a few days, trying to corner the Natural Gas market?  Nymex actually called up Amaranth to warn them that they were moving the market, especially as Hunter kept doubling down on his bet.  Word got out and everyone else stopped trading significant volume, trapping Amaranth in their position. 

This was a time-spread, so going long one month and short another.  So cornering the market using shorts has been attempted before, but pretty unsuccessfully.

Pretty good summary at https://www.investopedia.com/articles/07/amaranth.asp

[Otis11 + 551]

12 hours ago, Zhong Lu said:

So sayeth "KeyboardWarrior."  I'm only toxic to people who are toxic to me.  Note how the second post in this thread was a personal insult.  I merely responded to remind everyone what a piece of shit he is for attacking first, without provocation.

Are you a piece of shit, Keyboard Warrior, or do you have the intelligence/self-awareness to NOT launch the first personal attack? 

Honestly? Responding aggressively just muddies the waters and makes everyone look foolish. Let him attack and respond with logic and you'll show the true situation.

11 hours ago, Zhong Lu said:

Perhaps, but the inventory levels are a reflection of both supply and demand.  In theory it shouldn't matter if more gas wells are coming in online if the inventory levels don't change. 

So inventory isn't a good representation of over/under supply - it's a representation of expected future delta. Since it costs money to store, I'm only going to pay for storage if I expect prices to be higher in the winter than in the summer. If I expect that price delta to be the same as last year, I'm going to store the same amount as last year, regardless of whether prices are 3x what they were last year, or half. Storage is about the delta.

Right now there's sufficient supply in the market to meet demand, so to get rid of the natural gas, producers have to sell at lower rates. Normally this would be bought up and put into storage (increasing storage as you're looking for), but currently the market expects future prices to remain low - aka same delta price and therefore no incentive to increase storage. 

That's how the market drives down today's price without driving up storage.

There's also the geopolitical risk factor - since this production is local to the US, there's little risk of supply interruptions, so little upside risk. There is, however, risk that producers will be required to capture their NG and reduce flaring/venting, which is providing moderate-to-soft downside risk.

Also on exports - those exports do affect the HH price. Even though gas may not be going directly from HH to LNG Export, that gas that would have been exported is now being used to satisfy demand that would have pulled from HH. This depresses HH demand, and therefore HH price.

 

Just my 2c.

[Zhong Lu + 845]

3 hours ago, Otis11 said:

Honestly? Responding aggressively just muddies the waters and makes everyone look foolish. Let him attack and respond with logic and you'll show the true situation.

So inventory isn't a good representation of over/under supply - it's a representation of expected future delta. Since it costs money to store, I'm only going to pay for storage if I expect prices to be higher in the winter than in the summer. If I expect that price delta to be the same as last year, I'm going to store the same amount as last year, regardless of whether prices are 3x what they were last year, or half. Storage is about the delta.

Right now there's sufficient supply in the market to meet demand, so to get rid of the natural gas, producers have to sell at lower rates. Normally this would be bought up and put into storage (increasing storage as you're looking for), but currently the market expects future prices to remain low - aka same delta price and therefore no incentive to increase storage. 

That's how the market drives down today's price without driving up storage.

There's also the geopolitical risk factor - since this production is local to the US, there's little risk of supply interruptions, so little upside risk. There is, however, risk that producers will be required to capture their NG and reduce flaring/venting, which is providing moderate-to-soft downside risk.

Also on exports - those exports do affect the HH price. Even though gas may not be going directly from HH to LNG Export, that gas that would have been exported is now being used to satisfy demand that would have pulled from HH. This depresses HH demand, and therefore HH price.

 

Just my 2c.

LOL.  ALWAYS RETALIATE.  More fun that way.  Just make it clear to who you're retaliating and why, and don't involve anyone else who didn't attack you.  

In regards to the main point: But Otis, if it's not worthwhile putting gas into storage, why is anyone putting gas into storage in the first place? 

Edited February 11, 2020 by Zhong Lu

[George8944 + 128]

18 hours ago, Zhong Lu said:

The major problem with your position, George, is that if both supply and demand curves shift right, price stays flat.  The inventory is a reflection of BOTH the supply and demand curves- the reason inventory is flat despite increasing supply is because demand is shifting right, too (increasing).  Consequently, price should stay flat.  And yet it's going down.  

The basic supply-demand chart taught in econ 101, while useful, is very simplistic and totally devoid of any human emotion or insights.  Supply and demand does drive markets, but so does human fear and optimism. Inventory (the stuff above ground) is flat because the supply (yet to come from the well)  is so readily available. Our 4 trillion cubic feet of NG storage capacity does not need to be filled.   What's more, with prices continuously dropping, there is no need for the owners of those storage sites to fill them at today's price when they believe they will be selling what they have at a lower price tomorrow.  

Should a prolonged polar vortex weep down upon the whole of the US driving temperatures below freezing in the deep south,  you would see NG price spike. While the supply in the ground is ample, it does take a fixed amount of time to reach consumers ( hence a buffer storage outside the well). 

I believe prices are dropping because there is a perception (probably fact) that we can supply more NG than we will have near term demand.  Even though the chart shifts to the right,  supply is still out pacing demand.

[Gerry Maddoux + 3,627]

^

George, I'll say it again: I have no idea how a young man like you could be so wise. 

You are totally right. Just yesterday Total pulled up at a port in China with a large load of LNG. China declared force majeure. Total said no doing. 

Why? Because they likely had nowhere else to go. I would imagine that pipeline gas will fall to $1.50--it's just that bad right now. 

While it sounds paradoxical, the Texas Railroad Commission could stop this in its tracks, by simply enforcing their rules on venting and flaring. By letting producers do this, they're encouraging aggressive drilling, merely postponing lots of inevitable bankruptcies. Stop the flaring, lots of drilling would stop. Might not be enough but it would certainly beat this.

[Zhong Lu + 845]

7 hours ago, George8944 said:

The basic supply-demand chart taught in econ 101, while useful, is very simplistic and totally devoid of any human emotion or insights.  Supply and demand does drive markets, but so does human fear and optimism. Inventory (the stuff above ground) is flat because the supply (yet to come from the well)  is so readily available. Our 4 trillion cubic feet of NG storage capacity does not need to be filled.   What's more, with prices continuously dropping, there is no need for the owners of those storage sites to fill them at today's price when they believe they will be selling what they have at a lower price tomorrow.  

Should a prolonged polar vortex weep down upon the whole of the US driving temperatures below freezing in the deep south,  you would see NG price spike. While the supply in the ground is ample, it does take a fixed amount of time to reach consumers ( hence a buffer storage outside the well). 

I believe prices are dropping because there is a perception (probably fact) that we can supply more NG than we will have near term demand.  Even though the chart shifts to the right,  supply is still out pacing demand.

:Squinty eyes emoticon:

[Zhong Lu + 845]

6 hours ago, Gerry Maddoux said:

^

George, I'll say it again: I have no idea how a young man like you could be so wise. 

You are totally right. Just yesterday Total pulled up at a port in China with a large load of LNG. China declared force majeure. Total said no doing. 

Why? Because they likely had nowhere else to go. I would imagine that pipeline gas will fall to $1.50--it's just that bad right now. 

While it sounds paradoxical, the Texas Railroad Commission could stop this in its tracks, by simply enforcing their rules on venting and flaring. By letting producers do this, they're encouraging aggressive drilling, merely postponing lots of inevitable bankruptcies. Stop the flaring, lots of drilling would stop. Might not be enough but it would certainly beat this.

:Squintier eyed emoticon:

[Zhong Lu + 845]

10% position, U. 

[George8944 + 128]

22 hours ago, Gerry Maddoux said:

George, I'll say it again: I have no idea how a young man like you could be so wise.

Ha!   Looks can be deceiving; just ask my drinking buddy Dorian Gray.

It's not so much wisdom as it is humility.  Most every time I think I've figured out the puzzle quickly,  I lose a lot of money.  As I get older I spend my time assembling more of the jig-saw pieces and less time reacting to my first assumptions.  It's why I'm not a day trader.  

[George8944 + 128]

16 hours ago, Zhong Lu said:

China declared force majeure. Total said no doing. 

Yes, this will be interesting to see how it plays out.  The final joke may be on Total.   If China does not want that cargo, China won't unload it or worse yet, they will unload it and won't pay for it.  Total will take them to World Court to enforce the contract and by the time there's an enforceable settlement, the ship will rust and sink to the bottom on the ocean.

Total did the right thing for now, but time is on the Chinese side.  Total needs to work on their Plan B.

[0R0 + 6,251]

On 2/11/2020 at 5:05 PM, George8944 said:

The basic supply-demand chart taught in econ 101, while useful, is very simplistic and totally devoid of any human emotion or insights.  Supply and demand does drive markets, but so does human fear and optimism. Inventory (the stuff above ground) is flat because the supply (yet to come from the well)  is so readily available. Our 4 trillion cubic feet of NG storage capacity does not need to be filled.   What's more, with prices continuously dropping, there is no need for the owners of those storage sites to fill them at today's price when they believe they will be selling what they have at a lower price tomorrow.  

Should a prolonged polar vortex weep down upon the whole of the US driving temperatures below freezing in the deep south,  you would see NG price spike. While the supply in the ground is ample, it does take a fixed amount of time to reach consumers ( hence a buffer storage outside the well). 

I believe prices are dropping because there is a perception (probably fact) that we can supply more NG than we will have near term demand.  Even though the chart shifts to the right,  supply is still out pacing demand.

https://www.barchart.com/futures/quotes/NG*0/futures-prices

There is a contango so storage is an attractive proposition. Take delivery at spot sell future for next winter, automatic profit, only issue is financing.

If you are a producer you can hedge your expected production if you can make a profit somewhere up the curve. 

Besides, LNG has been shifting from pricing off of oil futures to pricing off of HH pricing, so hedging of LNG has to happen on the futures market for HH. So any turn aways of China deliveries will result in unexpected inventory that needs to be hedged till it finds a new buyer. 

[George8944 + 128]

On 2/13/2020 at 4:51 AM, 0R0 said:

Take delivery at spot sell future for next winter, automatic profit

First,  I must confess I don't know much about the futures market.  Mastering stock options has been work enough!   The devil is always in the details and nuances.  My guess is futures are similar enough however.

I can't believe there is any financial instrument (like a future's contract) that generates "automatic profits".   Everything has risk.  The reasons to buy a contract would be to hedge price,  lock up availability or both.  The assumption I think you are making is prices are going higher or product will be in short supply by next winter.   That could be a good assumption, but it is still an assumption that puts "automatic" in jeopardy. 

[0R0 + 6,251]

26 minutes ago, George8944 said:

First,  I must confess I don't know much about the futures market.  Mastering stock options has been work enough!   The devil is always in the details and nuances.  My guess is futures are similar enough however.

I can't believe there is any financial instrument (like a future's contract) that generates "automatic profits".   Everything has risk.  The reasons to buy a contract would be to hedge price,  lock up availability or both.  The assumption I think you are making is prices are going higher or product will be in short supply by next winter.   That could be a good assumption, but it is still an assumption that puts "automatic" in jeopardy. 

No. I am saying the market is giving you a chance to buy now at a certain low price and sell next winter at a predetermined price that you can fix now. It all depends on your storage  cost and availability. Obviously something you would routinely do in the industry. You might need to have some financial headroom to post collateral or be forced to sell your stored NG if the future goes against you. 

[George8944 + 128]

3 minutes ago, 0R0 said:

No. I am saying the market is giving you a chance to buy now at a certain low price and sell next winter at a predetermined price that you can fix now.

Yes, I understood that.  If you remove the word "low" from the sentence above, it describes how futures contracts work in general.   There is still risk.  I can't debate this, but things are rarely as simple as they appear.  My guess is there are many variable costs that come into play.  Is the cost of storage a fixed contract?  Can you borrow at fixed rate?  How about insurance against damage to the storage facility?   Transportation fees then and now, etc. etc. etc.  

I don't think buying the raw commodity is for us normal people.  The companies who do this probably have an army of lawyers writing T&C's and accounts sweating the details. The best us slugs can hope for is buying and selling existing contracts - something I don't plan on doing!

My only issue in your original post was the word, "automatic".  If profit were automatic there would be a line around the corner of people wanting in.

[0R0 + 6,251]

30 minutes ago, George8944 said:

Yes, I understood that.  If you remove the word "low" from the sentence above, it describes how futures contracts work in general.   There is still risk.  I can't debate this, but things are rarely as simple as they appear.  My guess is there are many variable costs that come into play.  Is the cost of storage a fixed contract?  Can you borrow at fixed rate?  How about insurance against damage to the storage facility?   Transportation fees then and now, etc. etc. etc.  

I don't think buying the raw commodity is for us normal people.  The companies who do this probably have an army of lawyers writing T&C's and accounts sweating the details. The best us slugs can hope for is buying and selling existing contracts - something I don't plan on doing!

My only issue in your original post was the word, "automatic".  If profit were automatic there would be a line around the corner of people wanting in.

It is if you are positioned to make use of it. Just as backwardation during tight markets allows you to make money by selling inventory now and buying a future to fill up your tanks some time down the road. You still need to have tanks and empty space for a contango or full tanks to make use of backwardation. Of course you need to have cash or collateral as well.