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.

If you’re interested in a more in depth look or wish to provide feedback, connect with Stephen Kessler.

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SEPTEMBER 19, 2017 

  • After one more test for the October contract under $3.00 a week ago, we have seen a very constructive rally up to $3.15. On Friday before Hurricane Irma made landfall we were trading $2.89 so we have rallied almost 10% off of those levels. I have talked for the past couple of weeks about the market looking like it bottomed, it may still be too early for a sustained run higher until some more weather is digested, but at the very least it looks like our new range has moved up .10 or .15. We have shaken off decreased demand from these hurricanes and the cash market has been strong and technicals have been constructive. Without an unexpected uptick in production or a run of very moderate weather the market looks like it may have plenty of dips and sideways action but there appears to be more upside run in it. Of course we had an endless string of weather failures this past summer so things can still unravel without some cooperation from Mother Nature.
  • With a week left in October I would stay away from spreading off of the V options contract. V still feels like it can cover its fairly modest straddle value but with so little time left it becomes a premium play and not vol or skew.
  • The Z/F vol spread is back at levels I consider too wide given the movement in the futures. I would specifically focus on strikes in the $3.00 area - the F put skew strengthened considerably over the week and a move up would just have a bit of positive gamma for the Z put long, a move down on a market failure and I do not think the significant vol premium will hold up in F.
  • Call skew in Q1 (particularly F and G) took a considerable hit last week as well. Given vol still seems to strengthen on rallies and soften on dips I would begin to keep an eye on fences - long call, short put hedged in those two months. It is not a trade that needs to be rushed into at all, but the at-the-moneys and high delta puts are trading at premiums that look unsustainable to me.
  • The trade I have included for weeks in the commentary remains attractive to me - selling H8 2.25 puts vs J8 or JV8 - I would wait for a pullback in the H/J futures spread, but if H vol continues to outperform, the trade can be initiated even with the spread this wide. I am still a believer that summer puts will have at least one run in them.
  • Even with the vol strength in XH over the past couple of days JV8 (and beyond) has softened as small pieces of strips several years out have had steady selling. The summer vol strip does not look cheap to me in a vacuum, but I do think the puts ($2.25 and $2.50) look cheap relative to summer calls. Again a trade I would not jump into with both feet because if Q1 continues to see vol strength it may prop up Q2 2018 calls - at least temporarily.
  • The market still feels like it is in a buy the dip mode, the difference being a dip is not necessarily $2.90, now it may be closer to $3.00. A technical failure alone could see us back down to $3.00 but the market is working hard to sustain these futures levels.