By Beacon Energy's Stephen Kessler

Enjoy this week's insights into the North American natural gas market sent to you compliments of ICE. With over 25 years’ experience in derivatives, Beacon Energy's Stephen Kessler shares analysis on market movements as well as his own trade insights.

Stephen Kessler
Natural Gas Broker, Beacon Energy Group

Kessler has been brokering at Beacon Energy Group since 2010, putting out commentary on natural gas market movements as well as his own trade insights. Kessler has more than 25 years’ experience within the derivatives markets, and prior to his role at Beacon, he was trading natural gas and soft commodity options both independently as a market maker and with a hedge fund.

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OCTOBER 17, 2017 

  • Since last Wednesday spot futures have traded in a fairly tight range - roughly $2.90-$3.04. Pre-weekend nervousness on Friday around $3.00 had vols at their highs of the week but yesterday’s disappointing open and action pressured X and Z vol. Q1 vol stayed fairly stable, perhaps foreshadowing the fact that we would open this morning right back at that $3.00 level in X. The market is itching to rally if it can get some weather cooperation - it is not clear that is imminent, and this morning’s tepid vol reaction does not make it seem like the market is moving so soon, but it does look more and more like in the near term we have limited downside. After heavy liquidation in the H/J futures spread it appears to have settled in again and as JV8 edged higher as a result of that selling, for the moment that strip now appears comfortable in the $2.95-$3.00 area.
  • Q1 implied vol has edged higher in the past week, though this time of year a vol roll-up would be expected virtually every week to offset the fairly significant theta at these vol levels. It becomes just as important to look at option premiums instead of vol to see if there is real strength or weakness in options.
  • The Z/F skew spread is still at levels I consider very attractive to own Z put and F call vs. Z call and F put. Given the market has pushed slightly higher I would raise the Z fence to something like Z 2.90/3.60 fence vs F 3.00/3.75 fence.
  • I still like trades similar to G/H $5.00 c/s 2 by 1 for flat premium - giving good protection/upside for late fall/early winter, and plenty of time to reassess weather/storage to roll out of it later. The Q1 straddles will likely start to hold their value better as we get later into the fall and closer to winter, so their gamma/theta profiles become far less significant.
  • The flow in JV18 was a bit more mixed this week, but there is still a clear bias to the puts. Fences to the put that I thought were cheap a few weeks ago have reset to levels I consider closer to fair, though I still think the $3.50-$3.75 area in JV8 (perhaps excluding J8 until winter action is clearer) is trading at premium/vol levels that are on the expensive side relative to meaty or even wing puts.
  • The call skew in J8 has stabilized, and it is now at levels I think are fair given the time of year we are in. Any hint of real cold weather should give J8 vol and calls a boost, at that point I would reassess to see if things are overdone. But selling that skew into weakness in a quiet time, after it has readjusted makes little sense to me now. Ultimately I think the back half of 2018 will prove cheap compared to Q2 in vol terms but I would scale into it and not use all of my bullets before winter weather is clearer.
  • I do think that late summer 2018 puts look like good relative value buys against the J18 at current vol/skew levels (i.e. J/V 2.50 p/s hedged). It is the J calls I would be less aggressive with at these levels.
  • The market has gotten very sticky in this $3.00 area in the front, but I will reiterate that I see more of limited downside and potential upside if - and it is a big if - the weather really turns. We are in a time of year and at a price where I think the short term risks are to the upside in futures, though sideways action for a bit still feels like an equal risk.