- Most energy trading takes places at NYMEX and ICE
- Henry Hub is the delivery location for the NYMEX natural gas futures contract and is used as the benchmark for all natural gas sold throughout the United States.
- Prices in the forward market tend to mirror consumer demand—both are high in the winter and fall dramatically in the spring of every year. Spot prices don’t show the same kind of seasonality
- Typically, sale of power are in hourly increments on a day-ahead basis or in five-minute increments during the day that power is to be delivered.
- Most speculative power trading goes on in forward markets
- The forward markets are typically based on the price of delivering power at a major hub. Time horizons for forward trades range from the rest of the current month to approximately five years out
- In deregulated mar- kets, the clearing price is based upon bids submitted by power produc- ers. These bids contain a price schedule matching volumes of power to prices. Power plants are activated in lowest to highest cost order until the consumer demand is met.
- Daytime hours (usually 7 a.M. until 11 p.M.) are called peak hours. Nighttime hours are called off-peak hours.
- 7×24 refers to power 7 days a week, 24 hours a day. Peak power is 5×16 or 7×16 (depending on whether weekends are included). If weekends aren’t included, there will be a separate 2×16 product. Off-peak hours are typically 7×8.
- the Pacific Northwest contains abundant hydro plants that produce extremely cheap electricity when there is sufficient water flow on local rivers. Sometimes after a major snow melt in the spring months, the price of electricity can fall to zero or negative since the dams can’t be closed and every other power plant needs to be penalized for continuing to produce power. Because this power is inexpensive, transporting it into Northern California can be profitable even though a lot of the power is lost in transport.
Spread option
Call Payoff = Asset Price – (Asset Price 2 + Strike Price)
Call Payoff = Location 1 Price - (Location 2 Price + Transmission Cost)
SABR, how to calibrate parameters for crypto?
- beta: often set as 0.5 for equities, 1 for crypto
- initial guess for alpha (current IV), rho (slightly positive or negative based on recent underlying crypto movement), nu (higher as crypto is highly volatile)
- goal: best fit to market vol surface
- least square optimization
Payoff of Energy Assets
Many energy assets, particularly the ones that can be mod- eled by options, have asymmetrical payoffs.
A peaking power plants is idle for most times in a day, costing small operational charges daily. But chance for large profit during summer
Many types of energy are impossible to store. In other cases, a steady supply of new product is constantly reaching the market. As a result, current prices and future prices are rarely linked. Instead, energy mar- kets tend to experience cyclical variations in prices
Energy trading primar- ily consists of buying and selling agreements to deliver power at some point in the future. The time and location where the energy needs to be delivered is a key component in these agreements
The spot prices in Chicago don’t reflect expectations of future prices. Customers need heating im- mediately and can’t put off their purchase until prices are cheaper in six months
When someone turns on a light switch, power needs to be immediately provided. It isn’t possible to substitute another type of power—when a homeowner in New York turns on a light, the power company has to provide power in New York. Provid- ing power somewhere nearby, like New Jersey or Connecticut, won’t meet the New York demand. Because of the inability to transfer energy products without prepa- ration, there are a large number of local spot markets. Each can have its own rules and regulations. The prices in each are determined by local supply and demand. As a result, since supply has to be arranged ahead of time, spot prices can be extremely volatile. It is easy for an unexpected change in demand to lead to either a shortage or a glut in local supplies
High spot prices in one area don’t necessarily mean that nearby prices will also be high. It is very possible that one region can have a surplus of power and another a shortage when real- time transfers between the two markets are impossible. For example, if a power plant in California unexpectedly needs to go offline, prices there will spike upward as inefficient and expensive backup genera- tors are turned on. A nearby power market, like Oregon, might not see any price change—that market might still have a sufficient supply of power to meet local demand.
The high price volatility in the local spot markets and the lack of correlation between adjoining regions tends to disappear in the for- ward market. While there is still time to arrange transfers of power or line up fuel supplies, prices tend to be based on macroeconomics. For example, if a power plant outage is expected in six months, there is probably time to arrange cost effective backup generation rather than relying on units that can be brought up to speed immediately.
Physical delivery in Asia
Natural Gas Pipelines (Cross-Country)
- Russian and China (Power of Siberia Pipeline)
- Turkmenistan, Uzbekistan, Kazakhstan, and China (Central Asia-China Gas Pipeline)
- Myanmar and China (Myanmar-China Gas Pipeline)
- Multiple ASEAN countries, including Malaysia, Thailand, Singapore, and Indonesia (Trans-ASEAN Gas Pipeline (TAGP))
Transmission Line (Cross-Country)
- Russia and China (China-Russia Power Transmission)
- China, Laos, Thailand, Vietnam, Cambodia, and Myanmar (Greater Mekong Subregion (GMS) Power Grid)
- India, Bhutan, Bangladesh, and Nepal (South Asia Subregional Economic Cooperation (SASEC) Power Transmission)
- Malaysia and Singapore (Malaysia-Singapore Interconnection)
- Laos, Thailand, Malaysia, and Singapore (Laos-Thailand-Malaysia-Singapore Power Integration Project (LTMS-PIP))
Most OTC agree- ments are based on a standard agreement produced by the International Swaps and Derivatives Association. The most important feature of ISDA agreements is that all agreements between two parties form a single contract. This is important in bankruptcy cases because the credit risk under ISDA contracts is limited to the net amount of all contracts.
LNG accounts for approximately 40-45% of the global natural gas trade. Pipelines still account for the majority of natural gas trade, around 55-60% globally. Pipelines are particularly dominant in regions like Europe, Russia, and North America, where large and established pipeline networks connect producers to consumers.
Nearly 100% of electricity is delivered via transmission and distribution lines. A small percentage of electricity is transferred internationally through cross-border transmission lines, but the vast majority is used domestically within the countries where it is generated.
From the standpoint of an exchange, daily margining limits the exchange’s exposure to counterparty risk. Since the mark-to-market price should give a fair indication of where trading occurs, the ex- change only needs to cover the risk of holding an asset for a single day. For example, if a trader fails to make a daily margin call, the exchange can take ownership of that futures contract and the initial margin sup- porting that contract. It will then liquidate the contract and keep the initial margin. As long as the initial margin covers the one day of losses that the exchange is taking on the deal, the exchange will make a profit from the liquidation.
Since the risk taken on by the exchange is proportional to the daily price moves, initial margins will be higher on more volatile commodities.
Spread trades (60-80% of power&gas trades)
- buying gas and selling power allows the trader to benefit if the price of electricity rises faster than the price of fuel used for power generation
- buy natural gas in Louisiana and sell it in New York trader will benefit if the regional price of natural gas in New York—a major consuming region—rises relative to the price of natural gas in a producing region.
- time/ calender spreads: diff delivery dates, e.g. summer vs winter gas contracts
- location spreads: diff hubs
- inter-commodity spreads, e.g. gas vs electricty/ crude oil/ coal
- Natural gas is considered “dry” when it is almost pure methane, and “wet” when it contains substantial quantities of the other hydrocarbons.
- Spread Trading: You can trade the differential between dry natural gas (methane) and wet natural gas (NGLs) by going long or short on natural gas futures while taking an opposite position in NGL contracts (e.g., propane futures).- buying call options on propane futures and put options on natural gas futures can be a strategy if you expect the frac spread to widen.
Option and volatility strategies (5-15%)
Outright long/short (10-20%)
Arbitrage (5-15%)
- risk free profit
- geographical arbitrage
- cross market arbitrage (e.g. spot vs future)
Hedging (10-30%)
- futures/options trades to offset physical trades
Basis is to describe the difference in price of a specific location from the price at the futures delivery location.
Components of Natural Gas
- Methane: 70-90% of natural gas
- main focus in trading
- $1.85 per mmbty
- Ethane: 5-15%, petrochemical feedstock, especially to make ethylene (key raw material of plastic)
- $0.23 per gallon
- propane: 1-10%, butane: 1-10%
- secondary focus in trading, particularly used for rural areas
- $0.76 per gallon
- pentanes: <5%
- nitrogen, co2, water, sulfur: 1-7% (impurity and removed)
Frac Spread
Frac spread
=
value of NGLs (a weighted average of Mont Belvieu NGL prices)
-
natural gas (front-month Henry Hub natural gas futures price)
Unit: dollars per Btu
Major Natgas ETF/ETN
United States Natural Gas Fund (UNG)
- ETF
- track the daily price movements of natural gas delivered at the Henry Hub, primarily through near-month futures contracts traded on the NYMEX
ProShares Ultra Bloomberg Natural Gas (BOIL)
- ETF
- leveraged ETF that seeks to deliver 2x the daily performance of the Bloomberg Natural Gas Subindex
ProShares UltraShort Bloomberg Natural Gas (KOLD)
- ETF
- deliver 2x the inverse daily performance of the Bloomberg Natural Gas Subindex
- ETN
- exposure to the Bloomberg Natural Gas Subindex Total Return. As an ETN, it’s a debt instrument issued by Barclays Bank
First Trust Natural Gas ETF (FCG)
- ETF
- performance of companies in the natural gas industry, including those involved in exploration, production, and distribution of natural gas.
Bloomberg Natural Gas Subindex
- track the performance of the natural gas market by measuring the returns of natural gas futures contracts
Major natural gas-related indices
Henry Hub Natural Gas Spot Price
- benchmark for NYMEXfor natural gas prices in North America. It reflects the spot price of natural gas at the Henry Hub in Louisiana, a key distribution hub.
Bloomberg Natural Gas Subindex (BCOMNG)
- tracks the performance of natural gas futures contracts, typically those traded on NYMEX. It is used as a benchmark for various financial products, including ETFs and ETNs
S&P GSCI Natural Gas Index
NYMEX Natural Gas Futures Index
ICE Natural Gas Index
- benchmark for europe
Platts JKM (Japan Korea Marker)
- spot price benchmark for spot LNG (liquefied natural gas) prices in Northeast Asia, covering markets like Japan and South Korea. The JKM reflects the price of LNG delivered to these countries.
Argus Natural Gas Americas Index
On utility bills, the cost that most customers pay for their natural gas will be a combination of the citygate price (the price of the gas delivered to the local utility from an interstate pipeline) and a local delivery charge. Commonly, local delivery charges make up about half the total retail cost of natural gas.
No comments:
Post a Comment