Good Morning,
Our fundamental takeaway is things were bullish, the market will remain bullish for the next week, and sometimes fear is a good thing. I doubt we’d still be a species if we didn’t have the fear gene; our ancestors would all be in the belly of a hyena a long time ago. So we fear this market, and APT is a fearless strategy that steps in and fades what it sees as anomalous markets. We’d be afraid of that strategy today, so let’s walk through what the model sees.
These are the biggest moves in the monthly markets, excluding BOM which is ignored by APT because fading that market can, and often is, perilous. Belly of the hyena, precarious. Instead, the Monthly APT looks at Prompt through the following four months (Feb, today).
The first table returns the biggest upward moves, week-on-week; meaning these are the trade ranks that have gotten better and should be the focus of our attention. The second table is just the opposite; these are the trades that have fallen in rank. Where once they were the apple of APT’s eye, now they are sewer rats worthy of liquidation.
NP15 LL Feb-Jan
We don’t care for the trade because it is illiquid, it hasn’t moved recently, but the model uses the last year of market and forecasts, so it comes to the front of the “Moves.” That said, it is ranked a lowly 126 which brings us to a different point. Most of today’s biggest moves have inferior ranks, so let’s re-sort APT on Rank:
There, now we have the creme de la creme at the top, let’s start with those. The number one ranked monthly is the NP Oct On: Off
Now that’s better. This product is tippy-toppy after hitting a high and now drifting sideways. The problem, however, is cash. With San Jose posting 100s for the next week the on|off will be under tremendous pressure and most likely will spill into Prompt. That said when the cash spread cleared at $70-80 the Prompt barely moved. Imagine what happens two weeks from now when cash settles $4.00? Also recall that ISO hydro chart, light load hydro is falling fast and will be another 1000 MW lower in Oct. Not for the faint of heart, but we’d be comfortable putting this on, or not.
The number two monthly trade is the Feb SP-MidC Onpeak:
The model loves it because it bounced off its high and the market has been more volatile than the forecast. Frame the trade from a cash perspective, and executing still might make sense. The Northwest gets hotter (so does SP), but water in the former gets tighter. The COI derate doesn’t help things, cash-wise, yet the trade remains viable. Most of this premium was driven off of that massive low-level snow melt at MidC last year, don’t count on that repeating itself.
We’ll skip the next couple because they are the same trades as #1 and #2, and go to the PV Dec LL:
The market is close to a contract low; it has come off 600 btus in the last three weeks – why? No one has any insight into Dec, aside from gas. While cash is so bullish, it’s rare to find anything to buy, and the PV Dec LL is cheap.
Enough of the months, let’s look at the Qs next. The number one Q trade is shorting Q218 SP HL:
I think we’ve talked about this before, but find it even more compelling today, following the cash crazies. While SP screamed and gas went nuts, the heat rate didn’t budge; it came off a touch. Just wait until the Winter doldrums set in and some of the hourly LMPs settle negative, and they will. We sincerely doubt cash will be clearing at 10.8 heat rates, try 7.0.
The chart is the same trade, but you can own it for less VAR. During the blowout this week the spread came off a touch. The fear is gas, but with Aliso back to injecting there should be fewer worries on that front than last year. This spread also has been driven by one of the wettest MidC springs in recent memory. Don’t bank on that repeating itself. In fact, look how the spread traded while MidC lived through that Siberian hell last Dec-Jan; it traded negative. We like it and would short it. You can also do this at NP, it’s the same trade, though.
Let’s try to find a buy; everything is a short because cash is so mighty, The first one that catches our eye is the NP Q418-Q318 HL roll:
The roll hit bottom on Aug 2 then rallied; now it is free-falling back to those same levels off of recent cash strength. Historically, the roll has been at -400 btus; now it is -970. Will it fall further? It didn’t yesterday, the day it should have, and we think by Nov we’re back to the -400 to -500 range.
Another “buy” that the model flagged is the Q218 NP-SP LL spread:
Contract lows were set on Aug 21 and have bounced up a bit since. The Socal gas situation is the wildcard, but we’re not convinced it is that big of an issue. How much of the current spread is Harvey related? Once the Permian is back to full production that spread will collapse back to reality. This is cheap and safe.