The quest for a positive Basis in the U.S Gas Trading Market.
You already know much about the shale Gas Boom and its corollary; low natural gas prices in the U.S
U.S Gas is currently trading at a nearly flat basis because a lot of new pipelines were completed during the shale gas boom and a period of very slow economic activity.
The term “basis” here stands for a price differential of two locations, in this case it is the difference between the U.S. natural gas benchmark price at Henry Hub (HH) and other regional hub prices.
Iroquois Hub has a basis = Spot price at Iroquois minus HH spot price. +76
Chicago Hub has a basis= Spot price at Chicago Hub minus HH spot price. +45
Waha Lone Star hub has a basis= Spot price at Waha Lone Star Hub minus HH spot price. -15
HH has a basis= 0
A Natural gas basis swap can be use to hedge or trade the basis.
Behavior of the Basis:
- Less Volatility in prices kills the Basis. More Volatility in prices moves the Basis.
- Historically lower gas prices level are translated into lower basis between markets and fewer opportunities for the natural gas basis trader.
Basis used to be 1-2$/BTU av. between many hubs in the U.S. Trader use this Basis to enter into a take or pay TOP with a producer, covering the pipe fees and swing gas in the market !
With shale gas, you see gas everywhere and prices smoothing. What used to be a big trade in Natural Gas has dry up…
The average basis between Kinder Morgan REX (see below) and one of its market end, The Columbia Gas Transmission – A regional interstate natural gas pipeline system that transports natural gas from pipeline interconnects in Appalachia to markets on the East-Coast was 26 cents this week.
A 26 cents basis and the pipeline toll cost about 25 cents, it is 1 cent underwater. This is not enough to justify buying cheap gas in the spring season, financing it and storing it for a future delivery. ex: Selling it in the Summer, high heating degree days (High demand, High Prices).
Low volatility can be bad
We often hear that high volatility is bad but don’t hear about how low volatility is bad.
The lack of basis means for traders who feed the basis(you and me who will use air conditioner in July) will have no role in this kind of market.
Since more than 2 years of low prices, low volatility, and low basis, traders are leaving this market because of more than ample gas supply across regions.
The financial layers of the trade are thin and once a shock will happen in supply or demand , we will see if the market without the gas marketers will be able to deal with some violent volatility (not necessarily prices) moves in the NG.
The right side of the market
If you have heard someone in the Natural Gas saying; I am on the right side of the market and people like us have good opportunities…Beware of the right side, his market is the Enron side*; writing volatility-risk (selling swap, options…)with a 100 m$ cash margin, he collects small chips on the table for unlimited risk.
Everything is fine on the ride side of the market until his Vega blows up, end of the story !
-The Trade Shipping and Finance Wizard
http://www.genscape.com/natgas-basis-reports (Basis mapping across 16 regions)
* [2013-04-26 a power trader has explained to me that I was incorrect, Enron was long vega upon this time]