00:00U.S. natural gas jumping almost 20%, topping $6 for the first time in nearly four years.
00:05Joining us now is Stephen Shaw of The Shaw Group.
00:07Stephen, welcome to the program.
00:08Can you just sort of frame for us the amount of...
00:10The pressure that's been put on the energy infrastructure in this country in the last 24 hours.
00:15We're at unprecedented levels right now.
00:17And what was really interesting was that two Fridays...
00:20The Friday before the MLK long holiday weekend is just how complacent...
00:25The market was and now the market is paying for that complacency.
00:29So...
00:30Let's frame this out now.
00:31So two Fridays ago, we had the weather forecast.
00:35Now we saw extreme heating demand in Chicago, your largest gas furnace market.
00:40Spreading all the way east up into New England, an area that was going to cover...
00:45Major production regions, Appalachia, which accounts for about one third of...
00:50of U.S. production of natural gas.
00:51And yet, even with that known, known...
00:55Out there, the market was completely complacent.
00:56On January 16th, spot gas traded with...
01:00Within six-tenths of a penny of three dollars.
01:03March gas, the last...
01:05winter contract traded at a discount to April, a spring contract and most...
01:10importantly, realized risk was higher than implied risk.
01:14That means to say...
01:15That options traders were discounting this event.
01:18Now we come into the...
01:20weekend, the MLK weekend, the weather forecast shifts.
01:23Now all that deep freeze...
01:25goes further south, all the way down to Texas, Louisiana.
01:28So now, three quarters...
01:30of U.S. production is now under stress.
01:32So you're looking at a market that was completely...
01:35complacent at the coldest time of winter and now they are scrambling for...
01:40BTUs.
01:41What we saw today is PGM, the largest grid operator...
01:45went ahead and told utilities, you have to secure your gas supply, not just...
01:50for the normal one day ahead, they have to go ahead now and secure it for one week ahead.
01:55So they are now forcing utilities to buy gas at the worst possible time.
02:00and utilities are paying up for that gas.
02:03Why did they discount this event so much?
02:05Stephen?
02:06That's a great question.
02:08You know, historically...
02:10if we look back since Dynamics started trading natural gas to the contract in 1990...
02:15historically, by this point in the winter, we've already seen the high price for spot gas.
02:20Typically, we see the highest price paid in about the first two...
02:25weeks of December.
02:26And this is generally because we go into the winter, you have a run-up, we don't know...
02:30what the winter is going to look like, but by December, you have a feeling of where we're going...
02:35where the supply is, where demand is, and then prices tend to drift off through the...
02:40winter, even during cold winters.
02:42So the market was extremely overconfident.
02:45in history repeating itself to the point where large institutional investors...
02:50when you look at the Commitment to Traders report, under the category of other reportables...
02:54their position...
02:55right before this cold front was...
02:57they were short two NYMEX contracts for every...
03:00one contract, they were long, so they were extremely vulnerable.
03:03So you have large speculation...
03:05regulators that were completely just under...
03:08under...
03:09pinning or excuse me...
03:10underwriting or just not assuming...
03:12this was just going to be the event it has turned out to be...
03:15now that we have the weather forecasts coming out...
03:18not only is it cold now...
03:20deep freezes here...
03:21if you look at the NOAA chart...
03:22going out to the third week of February...
03:25what you're seeing now is cold sticking around...
03:28from Chicago out to the east.
03:30so this cold doesn't look to be going away...
03:32and this is very important...
03:34because as I said before...
03:35last week...
03:36they were under counting...
03:38the risks...
03:39in the February...
03:40contract...
03:41well the February contract expires Wednesday...
03:43there's this automatic assumption...
03:45because February is trading...
03:47at such a large premium...
03:48now to the March contract...
03:49which...
03:50turns prompt on Thursday...
03:51there's an assumption...
03:52oh well...
03:53when the cold passes...
03:54the market's going to come crash...
03:55rushing down...
03:56don't count on it...
03:57because look at March...
03:58they're now looking at...
03:59realized...
04:00historical volatility...
04:01what we've actually seen...
04:02this market price variance...
04:04as opposed to what...
04:05options traders are not pricing...
04:06they're still...
04:07underpricing...
04:08a weather event...
04:09for the March...
04:10contract...
04:11so we're certainly...
04:12not out of the woods...
04:13at this point...
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