The natgas mystery continues!
Let’s start first with the following flashes from the CME via Reuters on Friday:
NYMEX PRELIMINARY DATA SHOWS NATGAS FUTURES OPEN INTEREST HIT RECORD HIGH ON JUNE 9–CME WEBSITE
PRELIMINARY DATA ALSO SHOWS NYMEX NATGAS FUTURES VOLUME SET NEW RECORD HIGH THURSDAY–CME WEBSITE
Which means the day after the mysterious mini-flash someone or some people, were trading natgas relatively furiously compared to normal.
But where exactly did these record volumes transpire?
As it turns out, definitely not the front month contract, which is usually the most liquid.
Volumes and open interest here were large but certainly nowhere near records:
If there was any sudden build up in open interest and volume on Thursday, it transpired on the curve — that is to say in contract months much further out into the future.
Most of these also experienced equally ferocious mini-flashes on June 8.
Here, for example, is trade in the fourth month:
And the related mini-flash:
Here’s the fifth month:
And the seventh:
And even the 16th month showed a larger comparative pickup than the first:
Now we stress this is only a theory, but it does stand to reason that someone somewhere was possibly positioning themselves further up the curve.
Also to note, there’s been some strange discrepancies in the United States Natural Gas Fund on Friday, as can be seen below in the charts comparing the UNG to its indicative net asset value (in red) and then to the front-month natural gas future (in yellow):
Now, these could be Reuters data feed errors.
But, they could also be real fluctuations in the UNG’s net asset value.
As we’ve reported before, the United States Natural Gas fund is currently invested in a total return swap worth something in the region of $895m (as of Friday). The fund was forced to take the swap out after coming close to breaching CME position limits in natural gas futures back in 2009.
The problem now, though, is that the fund is suffering sizeable outflows.
Consequently, its ordinary natgas-futures float, essential for managing daily creations and redemptions, is also being depleted.
As Olivier Jakob at Petromatrix previously pointed out, that leaves the fund with the option of either shorting futures, and/or unwinding its $895m swap. We understand the fund is more partial to the latter option. Of course, if it did indeed go down that road it would most likely take a few days for its total return swap bilateral counterparty to unwind its related hedges and potentially provide the fund with front month futures instead. At least that’s how we imagine the terms might work.
If that really is the case, we’ll know for sure if and when the UNG files an update and/or amends its daily holdings to exclude the total return swap it’s currently holding.
Like we said, it’s only a theory for now.
Related links:
The problem with commodity ETFs – FT Alphaville
Strange things still afoot in natural gas – FT Alphaville
Traders flummoxed by natural gas ‘flash crash’ - FT