INDIEC
ROUND TABLE ON GAS
BUYING STRATEGIES
February 13, 2001
Presentation by
Lynn Elder
A.E. Staley
Manufacturing Company
217-421-2644
Reasons gas prices may go up
Low natural gas storage
Competition with gas fired electric
generation in order to fill storage before next winter
New electricity generation will be gas
fired
Weather – temperature/hurricanes
Reasons gas prices may go down
High prices
Increased production
Increased import capacity from Canada
Moderating economy – effort on demand
Alternate fuel prices
Political factors
Weather
WHAT SHOULD I DO?
Two types of risks that can be taken
Supply Risk
Price Risk
Supply Risk
Firm vs. interruptible transportation
Interstate pipeline
LDC
Who owns pipeline capacity
Own name
Marketer’s name
LDC’s name
Examples of alternatives
Interruptible transportation –
alternate fuel capabilities
Give back transportation at set
temperatures
All interruptible, but “buy back”
minor amounts as firm if curtailed
Firm on interstate – interruptible on
LDC
Firm – winter / interruptible other
months
Supplier
Single supply vs. multiple supply
Small marketer
Marketer w/ major assets
PRICE RISK
Alternates available to manage “price risk”
Physical purchases
Delivery point
Financial markets – New York
Mercantile Exchange (NYMEX)
Take delivery
Cash out – apply results to physical
purchases
Storage
Market area
Production area – need transport to
get it to use point
Expectation that you will overcome
storage & value of money
Reliability
Do nothing
Combinations/portfolios
Approaches
Hedge
Trader
Speculator
FINANCIAL MARKETS
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NYMEX Status |
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Feb. 12, 2001 |
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actual |
actual |
current |
current |
current |
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Month |
1999 |
2000 |
2001 |
2002 |
2003 |
|
|
Jan |
$1.765 |
$ 2.344 |
$ 9.980 |
$ 5.780 |
$ 4.645 |
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|
Feb |
$ 1.810 |
$ 2,610 |
$ 6.293 |
$ 5.550 |
$ 4.525 |
|
|
Mar |
$ 1.666 |
$ 2.603 |
$ 5.810 |
$ 5.180 |
$ 4.580 |
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|
Apr |
$ 1.852 |
$ 2.963 |
$ 5.680 |
$ 4.520 |
$ 4.180 |
|
|
May |
$ 2.348 |
$ 3.090 |
$ 5.560 |
$ 4.440 |
$ 4.150 |
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|
Jun |
$ 2.226 |
$ 4.406 |
$ 5.560 |
$ 4.430 |
$ 4.210 |
|
|
Jul |
$
2.262 |
$
4.369 |
$
5.580 |
$
4.420 |
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|
|
Aug |
$
2.601 |
$
3.820 |
$
5.620 |
$
4.445 |
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|
|
Sep |
$
2.912 |
$
4.618 |
$
5.580 |
$
4.435 |
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|
|
Oct |
$
2.560 |
$
5.304 |
$
5.550 |
$
4.425 |
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|
|
Nov |
$
3.092 |
$
4.541 |
$
5.660 |
$
4.540 |
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|
|
Dec |
$ 2.120 |
$ 6.016 |
$ 5.750 |
$ 4.620 |
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|
Average |
$
2.268 |
$ 3.890 |
$
6.052 |
$
4.732 |
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|
WHAT DO WE DO?
Look at “seasonal strategy”
Winter
Greatest risk for price “blow out”
Summer
“Shoulder months” – between
winter/summer – summer/winter
LOOK AT WINTER
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Winter analysis
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99/00 |
00/01 |
01/02 |
02/03 |
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Dec |
$ 2.120 |
$ 6.016 |
$ 5.750 |
$ 4.620 |
|
|
Jan |
$ 2.344 |
$ 9.980 |
$ 5.780 |
$ 4.645 |
|
|
Feb |
$ 2.610 |
$ 6.293 |
$ 5.550 |
$ 4.525 |
|
|
average |
$ 2.358 |
$ 7.430 |
$ 5.693 |
$ 4.597 |
|
|
% below 00/01 |
|
|
23% |
38% |
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Questions, comments, observations:
What is the probability of seeing lower
winter pricing for the winter of 2001/2001 and 2002/2003 compared to
significantly higher pricing?
At best, we are looking at a $2.00
downside vs. $5.00 upside!
Possible strategy: Lock in portions of 2001/2002 and 2002/2003
with contracts.
If prices go lower, add to contracts
to average price down?
LOOK AT THE REST OF THE MONTHS
Spring/Summer/Fall Analysis
|
|
1999 |
2000 |
2001 |
2002 |
2003 |
|
March |
$ 1.666 |
$ 2.603 |
$ 5.810 |
$ 5.180 |
$ 4.350 |
|
April |
$ 1.852 |
$ 2.963 |
$ 5.680 |
$ 4.520 |
$ 4.180 |
|
May |
$ 2.348 |
$ 3.090 |
$ 5.560 |
$ 4.440 |
$ 4.150 |
|
June |
$ 2.226 |
$ 4.406 |
$ 5.560 |
$ 4.430 |
$ 4.210 |
|
July |
$ 2.262 |
$ 4.369 |
$ 5.580 |
$ 4.420 |
|
|
August |
$ 2.601 |
$ 3.820 |
$ 5.620 |
$ 4.445 |
|
|
September |
$ 2.912 |
$ 4.618 |
$ 5.580 |
$ 4.435 |
|
|
October |
$ 2.560 |
$ 5.304 |
$ 5.550 |
$ 4.425 |
|
|
November |
$ 3.092 |
$ 4.541 |
$ 5.660 |
$ 4.540 |
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average |
$ 2.391 |
$ 3.968 |
$ 5.622 |
$ 4.537 |
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Questions, comments, observations:
History is not necessarily an
indicator of things to come, but –
Higher prices, but not the risk of
major “blow outs” during most of the months
Possible strategy – purchase “no
cost/low cost” collars (buy/sell calls/sell below market put)
USE OF OPTIONS
Options |
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Calls
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Puts
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buyer |
seller
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buyer |
seller |
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right, but no |
obligation to |
right, but not |
Obligation to |
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obligation to |
sell that futures |
obligation to |
buy that futures |
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buy a futures |
contract if so |
sell a futures |
contract if so |
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contract |
ordered by |
contract |
ordered by |
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option buyer |
|
options buyer |
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NYMEX Prices
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|
13-Sep-99 |
13-Sep-00 |
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Oct-99 |
$ 2.737 |
$ 5.060 |
|
Nov-99 |
$ 2.879 |
$5.150 |
|
Dec-99 |
$ 3.006 |
$ 5.270 |
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Jan-00 |
$ 3.038 |
$ 5.240 |
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Feb-00 |
$ 2.868 |
$ 4.970 |
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Mar-00 Apr-00 |
$ 2.706 |
$ 4.650 |
|
May-00 |
$ 2.468 |
$ 4.260 |
|
Jun-00 |
$ 2.451 |
$4.275 |
|
Jul-00 |
$ 2.456 |
$ 4.230 |
|
Aug-00 |
$ 2.466 |
$ 4.220 |
|
Sep-00 |
$ 2.481 |
$ 4.210 |
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Oct-00 |
$ 2.521 |
$ 4.200 |
|
Nov-00 |
$ 2.667 |
$ 4.300 |
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Dec-00 |
$ 2.810 |
$ 4.410 |
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Jan-01 |
$ 2.850 |
$ 4.405 |
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Feb-01 |
$ 2.725 |
$ 4.160 |
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Mar-01 |
$ 2.597 |
$ 4.000 |
WHEN DO YOU NEED
BASIS PROTECTION?
No
alternate fuels
Can’t
shutdown
Didn’t
have firm transportation in my name