Natural Gas And Energy Markets Beyond Oil

The market trades the surprise against the consensus estimate, not the level. An injection of 60 billion cubic feet against an expected 85 is bullish, because 25 billion cubic feet less gas went into storage than the market had assumed. Moves of 3% to 5% in the minute after the release are routine, and spreads widen through it.

The annual rhythm behind it is roughly April to October for injection, when production exceeds demand and inventories are rebuilt, and November to March for withdrawal. Where inventories sit against the five-year average going into winter tells you how much buffer exists if the weather turns, and that buffer is what determines whether a cold forecast produces a 3% move or a 30% one.

Weather forecasts are the fundamental

In most markets the weather is a detail. In gas it is the demand curve. Traders watch heating degree days and cooling degree days, which measure how far temperature deviates from a baseline where neither heating nor cooling is needed, aggregated across population centres.

Because the major forecast models update several times a day, gas can move several percent on a model run that has nothing to do with price, supply or policy, and then reverse on the next one. Monday morning gaps are common because the weekend runs shifted. Anyone applying oil intuition, where the relevant news arrives on a schedule from producers and inventory reports, will be repeatedly wrong-footed by a market that reprices on a forecast four times a day.

One molecule, three prices

The regional split is the structural fact that most distinguishes gas from oil. There are three main benchmarks and they are not tied together the way crude grades are.

• Henry Hub is the US benchmark, set by continental production and pipeline flows.
• TTF is the Dutch hub that prices European gas, exposed to pipeline politics and LNG import competition.
• JKM is the north-east Asian LNG benchmark, which competes with Europe for the same cargoes.

In August 2022 TTF peaked above 300 euros per megawatt hour, which was roughly 100 USD per MMBtu in the money of the day, while Henry Hub was under 10 USD. Same commodity, roughly ten times the price, because the only link between them is liquefaction and shipping capacity that was already running flat out.

The Freeport LNG fire in June 2022 showed how strange that link can get. One US export terminal went offline, and US prices fell, because gas that would have been shipped abroad stayed in the domestic market, while European prices rose for the mirror-image reason. One accident, two large moves, in opposite directions.

What to have settled before you take a gas position

Know four things and the market becomes tradeable rather than random. Where storage sits against the five-year average. What the latest forecast run implies for degree days over the next two weeks. When the next storage report lands relative to your intended holding period. And the value of a one cent move on whatever size you are actually holding.

Then size for the tail rather than the average. If your usual stop is 1.5 times the daily range in other markets, a comparable gas position needs the same multiple of a much larger range, which means notional exposure has to shrink to keep the money at risk constant. That is the single adjustment most traders fail to make when they move from oil to gas, and the risk management guide covers the arithmetic that keeps the loss inside the budget.