Good Morning,
A quick walk through the fundies suggests a general cooling across the WECC; even NoCal gets some rain next week.
All that means is the state is more bearish than the temperature forecast would indicate. And BOM is in a free-fall, a death spiral downwards …
Party over, hopefully, you weren’t late because the keg is dry. The good news is you can now own something without mortgaging the house. But this is an “APT Back” post, not the front (that is Monday), so let’s see if there are any interesting nuggets in the back-end.
Roll – SP LL Q418-Q318
The biggest rank change was this roll.
The roll cratered off of the rally in cash, but this is a year into the future, go figure. Last time it tanked hard was also the last cash rally, if that isn’t proof of the market’s myopia what else is? Now it’s gotten cheap again, and we’re confident the roll will move back up as long as cash stays weak.
Here is the APT history for that product:
I post the table because there is some interesting information in looking at how APT ranks across time. Note the Buy recs in mid-August, then changed to Ignore or Hold when the heat rate rallied, now it’s back to being cheap. Also, note how the ranks moved down, then up.
That trade was gleaned from the “Biggest Moves” dashboard, but note that none of the other ranks in the table are that attractive, which suggests we should go to the dashboards that summarize the rankings by derivatives.
Highest Ranks – Outright Qs
We typically don’t like trading the outrights from a fade perspective, but let’s look anyway.
The number one outright is shorting the Q3 SP HL (these are heat rates). The reason – duh. The market exploded off of strong Aug cash and has rallied 1300 btus since mid-July. What APT likes most about the trade is the realized top over the last five weeks. All that is needed to turn this into a 500 btu in the park home run is some weak cash, though that isn’t on the near-term horizon. Still, shorting at these levels is a viable strategy to hedge front-end length. No point in looking at APT history, it has advocated shorting since it hit the high. And for the record, that trade has not been wrong but hasn’t been right, either.
The best buy:
APT likes the Palo Q119 LL because it is cheap, relative to the settles over the last year, and is under the forecast. We don’t like it because the trade is range bound and going into a potentially weak Q4 there will be little to drive this up. That said if I was a short-ute and I’d cover.
The best MidC buy is
The model sees it as still being cheap, and like the PV, if we were a short ute we’d consider covering today. If we were a greedy speculator, we’d probably punt on this trade given the recent rally. The history confirms the sentiment …
Several times the product was labeled a “Buy” and a few times later it became a “Hold” after rallying. Relatively speaking, the ranks are still strong because the rest of the product mix is mostly fairly priced.
On|Off Spreads
The model has a fetish over SP, from the sell-side. Let’s look closer:
Dangling from the highest tree branch with a noose around its neck, just waiting for a gust of wind to push it back to reality. Owning the onoffs is like being long a call and unless there is some tightness in Sep-Oct SP cash, this trade has a long ways to fall. That said, not for the faint of heart, but if we were long gencos (or utes), we’d sell that length today, in a heartbeat.
Next, let’s stay away from SP and Q3 by looking at the Q2 18 NP:
Interesting, market is soaring off of what? Last year’s water? That said, it’s a contract high and short at your peril, but with off peak water coming off hard, and NP cooling down, we are confident this deriv is going to correct back to the 1.85 range leaving a substantial profit for the patient.
Rolls
#1 Roll
Pretty much the same trade as the NP Q2 18 On|Off. Most of the Q2 strength is from June 2017’s cash which is hard to bank on for 2018. Unless there is a paradigm shift in values, the roll is rich and over-priced, but it’s also range-bound like most of what we’ve looked at in the Qs. Still, we like that it has come off hard in the last couple of days and would be comfortable shorting this at tody’s levels.
Next …
Another intriguing opportunity, buying the Q418 against the Q3 18 at SP (HL). This is just another example of cash’s important (and mistaken) impact on the term markets. Strong SP Aug cash sends the roll plummetting, and last week’s strength created a contract low. Over the last couple of days, as cash tempered, the roll made a mini-rally. We think it has more room to run up and would own it. One scenario that could play well for length here would be a neutral to mild BOM followed by one of those Oct Santa Anas. Strong Oct cash would probably be worth 500 btus.
Here is a Year on year roll:
Contango is the nature of most commodities, now the premium to 19 has dwindled to a minimum. Why? We have no answer except declining loads, or perhaps there is a plethora of new Q2 gen? No, that’s not it. Some of the past allure arose from the Carbon Tax hype last fall, and we know that was a mistake. Still, the product approaches contract lows. This might be a good hedge against a long 2018 book;l if we get big snow builds in Q4 and Q1, the Q2 is going to get pounded while 2019 not so much.
Spreads
The latest rally has driven the SP-PV Q4 LL up, but it’s not at the contract highs. The day PV traded over SP the roll tanked, so how many more cash days will that occur? We doubt many and would pass on the trade.
The trend isn’t your friend from a short-side on the Q2 SP-MidC HL spread. That said, we are heading into winter and MidC will get cold, maybe not like last year, but a good solid event in late Nov or Dec will cause this spread to implode. It’s all about timing, right now there is more likely more pain with SP approaching its Santa Ana season.
NPSP Q1 19 HL
The paradigm shift took place last spring, in the middle of May, and now the trade is range bound. How’s the 18 look?
No dramatic shifts, in fact, at the same time the 19 plummetted the 18 rallied. The 19 is trading at about a 2X premium to the 18, and we’re not sure why.