Energy Fund Taken To The Chipper

Let’s start with nat gas. Here is a chart of the natural gas future over the past five years, with the contract being adjusted to account for the roll (and a log scale included to make percentage declines equal).

Natural gas is one of those commodities with a ‘wickawd yuge carry as our Boston friends would say. It’s like VIX or grains. Owning it is painful as you need to be perfect with your timing, otherwise, the negative carry eats away any profits. That’s why the continuous roll shows such a nice long downtrend. The actual spot price was much more choppy, but the real-world return for short positions has been remarkably consistent.

On the other side, being long crude oil over the past year has been an equally terrific trade.

So let’s review. Over the past five years, short natural gas has been a consistent source of profit while crude oil has been rallying due to the synchronized global recovery.

It’s hard to dream up a more ideal trade for a macro hedge fund.

Yet, these trades are a little like the Hotel California.

The hedge fund(s) with this position has probably given away a large portion of their profit getting out. They have been taken to the wood chipper.

I know there will be all sorts of attempts to explain the markets through fundamental reasoning. Ignore them. Someone big just hit the puke-point for unwinding their long crude oil short nat gas (and nat gas spreads) position. It’s as simple as that. That’s why we are hitting record number of down days in a row. And it will only end when they are finished selling their crude and buying back their nat gas.

When the snapback comes, it will be vicious. These aren’t good prices that the fund is getting. Yet right now they are demanding liquidity and it is what it is. And it’s ugly.

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Disclosure: None.

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Snowhouse 1 year ago Member's comment

Cannot share this article on phone. Links not working.

Boaz Berkowitz 1 year ago Contributor's comment

Thanks for bringing this problem to our attention. We'll have our tech team look into it asap.