We use natural gas to heat and light our homes. The uses of natural gas are growing in numbers every day. Oil and gas companies must facilitate the movement and processing of these natural gasses from the ground to our homes. This process must be executed effectively, efficiently and safely. Regulations are in place to ensure the safest best ways to transport and store natural gas. The transportation systems in place to move natural gas from its source to our homes are very elaborate and complicated to describe. Natural gas is transported through an intricate network of pipelines from the ground and processing plants to its destination.
The first place that natural gas is transported is from the ground to the processing plant. These pipes are known as the gathering system, in essence gathering the gas that will be cleaned and processed into different useable forms. Thiols are added to the gas during processing. We add these substances because natural gas has no odor and thiols ensure that we can smell it if it ever leaks. Once it is processed, it is carried through an interstate or an intrastate pipeline network. Intrastate pipelines shuttle natural gasses around inside of one particular state. Interstate pipelines cross state lines and travel all over the country.
Pipes used to transport natural gas are made of carbon steel. Each section of pipe is sent through a barrage of rigorous testing to determine if it is resilient enough to withstand the pressure involved in transporting natural gas.
Gas must be sent on its journey under very high pressures. This keeps the gas in liquid form. It also significantly reduces the volume of the gas traveling through the pipeline, by about six hundred times. As a bonus feature, the gas in a pressurized environment acts as a propulsion mechanism, greatly reducing the time that it takes to move the gas through the pipes from the plant to the areas of highest natural gas use.
Natural gas can also be transported by boat. Huge tankers carrying liquid natural gas can carry natural gas to areas and countries where pipelines can not be built. Most natural gas tankers can carry over forty million gallons of pressurized, liquid natural gas in its tanks. Spherical storage tanks carry the gas across oceans and to far off destinations. Natural gas must be cooled to a temperature of negative two-hundred sixty degrees to become a liquid and reduce its volume to one six-hundredth of its original volume. The tanks are heavily reinforced to keep the gasses pressurized, cooled and in liquid form. Each tanker generally has five tanks built into it. Each single tank holds around 8 million gallons of liquid natural gas. That is about enough natural gas to provide all of the energy and electricity that the United States needs for about five minutes.
The processes involved in transporting natural gas can be very complex, dangerous and require lots of human labor. The pipeline industry is completely dedicated to ensuring the safety of the public, its workers and the environment.
Petroleum & Natural Gas
Natural gas has been utterly decimated since early July, dropping 60% from its high. There are several good reasons for the decline: a strengthening dollar, new supply and demand expectations, and bursting of a commodities bubble. Volatility is a scary thing, but it is the bread and butter of the savvy option investor. There are several ways to play natural gas that can more than pay for your winter heating bills.
I highly recommend trading natural gas ETF's for the amateur investor. These funds offer identical exposure to price movements, while limiting the leverage risks associated with outright futures trading.
My thesis on natural gas is that it has dropped sufficiently to expect future volatility to level off and return to historical levels. Three month volatility is currently up to 54%, while the long-term average is 45%. Looking at market implied volatilities shows that aggregate investor sentiment is that downside volatility will decrease in the near term; in fact, implied volatility for Sep08 strike 30 puts is 48.17%. On the flip side, strike 42 calls have an implied volatility of 63.17%, which is remarkeably high. The invisible hand of the market is telling us that natural gas has a higher probability of moving higher than lower.
To play this information we have several options:
Buy UNG. The ETF is trading for just under 38 per share. There is no dividend, but potential capital gains implied by the market could make this a lucrative bet.
Buy call options on UNG. I recommend buying longer term calls, starting with Jan10 contracts. Buying options at or in-the-money (ITM) will reduce time premium and contact some element of intrinsic value. I recommend going this route, perhaps looking toward the 37 and below strike calls.
Ratio spreads, skewed iron condors, and bull put spreads. These are more complicated, but less risky option combinations. As an example, VPAG just opened an iron condor with a 30/35/42/47 profile. This means we sold 35 strike puts and 42 strike calls, and bought 30 strike puts and 47 strike calls. This limits our downside if UNG falls below 30 or rises above 47. We received a 1.58 credit per share on each spread sold, or $158 per contract spread.
Options markets are by no means magic balls into the future, but they do tell us where the majority of investor sentiment lays. In this case, we know the market expects natural gas to launch into a bull rally. Given how badly it's been slaughtered in the last two months, this makes sense; however, nothing is certain but death and taxes. I offer this observation in a position of complete humility, only so that you can determine for yourself if you want to adopt any of the recommendations. By how badly I just got my butt kicked in the recent US dollar bull run, I truly mean my disclaimer of "humility.
Both Mickey Horn & Rob Viglione are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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