Liz Hoffman at the Wall Street Journal does a nice job getting into some details of a natural gas trade gone bad here…
“Goldman wagered that gas prices in the Marcellus Shale in Ohio and Pennsylvania would rise with the construction of new pipelines to carry gas out of the region, said people familiar with the matter. Instead, prices there fell sharply in May and June as a key pipeline ran into problems.”
“Goldman’s key miscalculation last quarter was betting that natural-gas prices in the Marcellus Shale would rise relative to the national benchmark price in Louisiana known as the Henry Hub, the people familiar with the matter said.”
Here is the price chart:
“Goldman was in part likely catering to gas producers in the region that wanted to lock in steadier revenue through swaps and other contracts. Many Marcellus drillers reported big gains in the value of their derivatives portfolios in the second quarter—meaning their trading partners lost money in that period, at least on paper.”
Actually, trading partners probably didn’t make enough on the hedge to offset losses on the derivatives… A typical position for the dealer would be long Marcellus (buying from producers), short Henry Hub, which from the chart is a loser…
Natural gas spreads have been notoriously volatile over the years… March/April natural gas is known as the widow maker as it has ruined many traders over the years… The Marcellus/Henry Hub spread will be an interesting chart to watch as we get into the winter…
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