A natgas storm in a tea-cup | FT Alphaville

A natgas storm in a tea-cup

A yet ‘undisclosed’ hedge fund has taken out call options at triple — yes triple — the price of today’s spot market price for natgas come winter.

Here’s the mysterious trade in question:
Natgas calls on Nymex

As the FT reports:

Traders took notice last week when the fund, as yet undisclosed, spent millions for the right to buy US natural gas at $10 (£6.03) per million British thermal units in January and February, up from Wednesday’s spot level just above $3 per mBtu.

We, however, are not exactly aghast.

While current fundamentals are indeed weak and all evidence points to a glut of supply in the US market due to an ongoing proliferation of shale production, there is another factor to natural gas prices that should not be forgotten: they are, and always have been, seasonal. And, come winter, the biggest determining issue — even with mounds of storage going into the season — will, as always, be weather.

Commodities-focused trading houses often even employ in-house meteorologists just to try and beat offically published weather forecasts for that reason.

Meanwhile, as can be seen below, a $10 bet is hardly out of the normal range, even when compared to the seasonal deviation from summer prices of levels of around $3 per mBtu.
Natgas prices 10 year - FT

In which case, could this mysterious and supposedly questionable hedge-fund bet be more related to a view on the weather than anything else?

After all, on August 19 the World Meteorological Organization said the El Nino phenomenon — currently causing havoc in soft commodity prices but which generally has a dampening effect on natural gas prices as it brings warmer weather in the winter — might actually turn out to be weaker than first expected.

Here’s the Reuters report for your consideration:

GENEVA, Aug 19 (Reuters) – An El Nino building up in the Pacific looks like being only a mild version of the phenomenon that has in the past brought devastation around the globe, the United Nations weather agency WMO said on Wednesday.

But the World Meteorological Organisation warned that even a weak El Nino — a phenomenon in which changing sea temperatures in the Pacific Ocean affect weather around the world — could seriously disturb normal climate patterns in many regions, bringing drought to some places and heavy storms to others.       “What appears to be emerging is a weak to moderate El Nino, but one that will continue for the rest of this year and stretch into the first quarter of 2010,” senior WMO climate scientist Rupa Kumar Kolli told a news conference.

He said the new El Nino would have nothing like the strength of the 1997-98 version — the worst on record — which produced extreme weather that wreaked death and destruction across the southern hemisphere and parts of the north.       That El Nino brought huge storms which battered western coasts and towns in Latin America, killing hundreds of people there and elsewhere around the globe and causing billions of dollars of damage in Asia and Australia.

Both developing countries and richer nations have been anxiously watching the new event in the Pacific, fearing that even minor changes in weather patterns could seriously damage economies already battered by the global recession.       Kolli was presenting a WMO situation report and outlook for the alternating and linked El Nino/La Nina events in which sea surface temperatures in the Pacific, the world’s largest ocean, either climb above average or drop below it.       Kolli did not say how El Nino would affect any particular region.

Related links:
Natgas, literally under pressure
– FT Alphaville
U.N. weather body sees “weak to moderate” El Nino
– Reuters