UK NG Risk Metrics : One day Trading VaR

The table below provides the price history for the 3 different price points.
  • NBP spot prices : Spot Natural Gas Price in UK.
  • TTF spot prices : Spot Natural Gas Price in Netherlands.
  • ZTP spot prices.: Spot Natural Gas Price in Belgium.
These three countries in Europe have interconnected pipelines as follows :

UK - Netherlands : Bacton bbl : virtual bi-directional flow
UK - Belgium : Bacton Interconnector : physical bi-directional

Using the above daily price stream, we calculate daily returns. We use 5 day equally weighted moving returns to calculate daily volatility and mean for each gasday.
A graph of the 5 day moving average volatility is shown below for each supply hub.

As seen above , TTF and ZTP vols follow each other very closely.Spot NBP jumps to around 3.9% volatility and then moves gradually back to 2%  volatility and below .

we will use the volatility data to calculate one day VaR ( Value at Risk). Value at Risk in short tells us what is the probability of loss or profit for a given time frame with a given level of confidence.

Since we are using one day volatility, we would calculating one day VaR with 99% confidence interval.(meaning  that there is 99% probability of an upside or loss).

if the underlying distribution were standard normal ( mean = 0, vol=1), than the formula would be :


but however our underlying is not standard normal.

we are using an Analytical formula to come up with the VaR figure. The Analytical approximation is

  • normsinv(probability,mean,stdev)*volatility*timeframe(days)
  • normsinv(0.99,mean,stdev)*daily_vols*1

As you see, the volatility and mean of the distribution changes each day and hence the VaR too.

The  graph below charts the daily VaR movement.

How do we read the graph or the table.

say for example on 2/26/2015 with 99% confidence, depending on whether we were short or long.
  • NBP portfolio component would have gained or lost 6% of its value 
  • TTF portfolio component would have lost or gained by 4% in value
  • ZTP portfolio component would have lost or gained by 5% in value
we can read the same for other gasdays's.

here the correlation between all the three instruments is taken as zero. ( random, no correlation) since each instrument is considered individually.

UK Spot NG Price Dynamics

check out Daily UK Spot NG prices for the period from Jan 30th to Feb 10th 2015.

All prices are given in dollars/mmbtu.

The Graph below compares the following :
  • Daily Wholesale Spot Natural Gas price at UK virtual supply hub called NBP. NBP is the natural gas pipeline grid managed by National Grid UK.  Gas can be scheduled into the virtual hub / network grid at different points on different pipelines of the network grid.
  • Daily Wholesale Spot Natural Gas price at Netherlands virtual supply hub called TTF. TTF virtual hub / pipeline grid is managed by Gasunie TS. Gas from Gasunie Network can flow into NBP through BBL pipeline. The connecting point is called at Bacton-BBL.
  • ZTP is the Daily Wholesale Spot NG price in Belgium. NG flows into UK through Interconnector pipeline. the point is called as BBL-IC.

The Table below shows the daily Spot prices at different Virtual hubs ( UK and Netherlands)  for each gasday

UK Natural Gas Supply Dynamics : LNG Supply Dynamics

UK ( United Kingdom) uses a mix of Northsea Gas, Summer Storage, LNG and surplus gas from Belgium and Netherlands for heating during the winter season. The units of measurement are MSCM ( Million standard cubic meters). MSCM has been converted to Bcf.

1 BCF = 1012  cubic feet = 106  mmbtu ( million btu)

North Sea gas : Northsea Gas is scheduled for supply into the UK grid from major pipelines from Norway ( Intercontinental shelf) and the North sea.

Northsea Gas accounts for 64% to 74% of the total supply.

Bacton terminal connects to supplies from two neighbouring countries.

Bacton BBL : supply from Netherlands.
Bacton IC ( Interconnect) : supply from Belgium.

Gas stored during summer in storage makes up the next big component.

LNG , supplies from Netherlands, Belgium make up the rest.

The Graph below shows daily supply percentage from Jan 15th 2015 to Feb 5th 2015.

The table below gives the actual daily supply numbers in Bcf.  depending on the amount of
North Sea Gas and Gas from Netherlands, storage gas and LNG jump around 10 % of the total supply.

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NG Basis Spread Short Trades around NYC

Texas Eastern Transmission (Tetco) carries 6.2 bcf of Natural gas daily to the NY-NJ area from Texas and Louisiana. The two main liquid, heavily traded supply hubs on Tetco are "Into Algonquin" and "Tetco-m3".

Basis Spread Trading : 
Short Strategy (betting on narrowing spread):   
short @ Into Algonquin, Tetco-m3 
long @ sourcing hubs along the pipeline
trading duration : 20 business days, heating season
As seen Above, majority of the desirable (narrow) spreads are around Tetco-m3 (third quadrant), with majority of spreads having a success probability of 60% ++, low spread volatility ,low spread mean.

Spike Density
Favorable spike probability (higher than normal narrowing) is seen more around Tetco-m3 as compared to Algonquin.

Short Basis Spreads with costs included :
Take your pick. A spread at Tetco-m3 is the best followed closely by a couple of spreads at Algonquin.

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Natural Gas Supply Dynamics to Boston, MA before & after Hurricane Sandy

Hurricane Sandy hit the NY_NJ area around October 29th 2012 causing extensive damage and devastation. Majority of the infrastructure in the area ( power lines, public transport, gas stations,etc) was badly affected. During such extreme events, we usually see high price &  supply volatility.

We will use Algonquin pipeline flow data for the period 20th October to 15th November 2012. The range was chosen so as to check out the before and after effect.  

Interactive Algonquin flow-data table.

log-log chart of Supply Vols to Prob. of Supply cut. 

As seen above Transco-Centerville (503K) is most dependable followed by TGP-Lambertville (1050K), while suppliers are more volatile at Millennium-Ramapo (572K) and TGP-Mahwah (257K).

log-log chart of supply vols to price vols.

TGP-Mendon(260K), Essex-Maritime(720K) & Lambertville-TGP (1050K) have high price & supply volatility, while tetco-Hanover(503K) has low price volatility but high supply volatility. Ramapo-NY(572K) & Transco-Centerville (208K) have lower price & supply volatility.

We are providing a free trial of our Sendout Analytics toolkit for the current heating season ( 2013-14). The NG Sendout Analytics tool comes with pre-packaged 2 year historic data for majority of pipelines. please sign up for the trial.

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In The Money NG Basis Spread Trading around NYC

Texas Eastern Transmission (Tetco) pipeline carries 6.2 bcf/day from the Gulf states of Texas, Louisiana to OH, PA, NJ, NYC. Actively traded & liquid supply hubs (pricing points) on the pipeline are shown below.

Basis Spread Trading : 
Long Strategy : @ Algonquin,  @ Tetco-M3
Horizon : 20 business days,  heating season
Algonquin spreads have larger spread vols (large either direction spikes), larger spread mean, around 47% In the Money probability.

Desirable spread trades @Tetco-M3 : tetco-z2 with relative smaller spread vol, smaller spread mean, higher In the Money probability. 

Spike density :
Again @ Tetco-M3. Tetco-ELA has a higher Spike density probability(26%).

Spreads with costs included

all of @ Algonquin spreads and a single point of @ Tetco-m3 are at the top of the heap. 

Take your pick.

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Optimized Natural Gas flow to Boston, MA

Algonquin pipeline runs through NJ, NY,CT RI and MA connecting to major interstate pipelines at different receipt points. 

Snapshot of NG Supply on Algonquin at any given day is shown : 

    The Circle size denotes Available Operational Capacity and changes daily.

    The Supply problem.

    Deliver 30,000 mmbtu of NG every day on Algonquin @ $5.00 per mmbtu given the following constraints at different receipt points.

    Suggested Solution.
    • Least cost @ $5.00 per mmbtu
    • Low probability of supply cut
    • Bids LE 6% of the daily available capacity
    • Supply drawn from multiple receipt point 
      • Maritime @ Essex, MA (1% of daily available capacity)
      • Tetco @ Hanover,NJ (6 % of daily available capacity)
      • Columbia @ Hanover,NJ (6% of daily available capacity)
      • Transco @ Centerville,NJ (6% of daily available capacity)

      Alternate Solution.
      • Least cost @ $5.00 per mmbtu
      • Low probability of supply cut
      • Supply drawn from 2 receipt points
        • Tetco Hanover,NJ: (13% of daily available capacity)
        • Transco Centerville,NJ: (20% of daily available capacity)

        Sub-optimal solution:
        • Least cost @ $5.00 per mmbtu
        • Supply drawn from a single receipt point
          • Transco Centerville, NJ: (39% of daily available capacity)

        The trial version of our cloud based Analytic engine is available at no charge for the current heating season 

        Please sign up for our free Trial Version

        Natural Gas Supply Dynamics to Boston, MA

        Algonquin natural gas Interstate Pipeline transports around 1.9 Bcf/day of natural gas to Boston & it's Suburbs. Natural Gas Utilities, Energy marketing firms, Merchant power generators transport natural gas using postage stamp rates across Algonquin Interstate pipeline.

        Some of the Interstate pipelines that connect into Algonquin at receipt points are
        • Texas Eastern gas transmission ( tetco)
        • Columbia gas transmission ( CGT)
        • Tennessee gas transmission (TGP)
        • Transco gas transmission ( transco)
        • LNG
        NG is delivered at city gates points or to lateral pipelines connected directly to power plants.

        Interactive table of Algonquin October 2013 flow data 

        The four main variables while maximizing Daily sendout are :
        • Operational Supply Capacity at receipt point
        • Supply volatility at the receipt point
        • Price volatility at the receipt point
        • Probability of a supply cut.
        There are multiple possible scenarios of maximizing daily sendout within the given constraints. Two of them are shown below.

        log-log chart of Supply Volatility to Prob of Supply cut. 

        Optimizing on Supply Stats, moving in an anticlockwise direction Lambertville,NJ (1050 K) in 2nd quadrant is the first choice, followed by receipt points(Hanover,Essex, etc) in 1st quadrant followed by receipt points in the 4th quadrant.

        log-log chart of Supply volatility to Price volatility

        Optimizing on Vols moving in an anti clockwise direction, Ramapo,NY (572K) in the 3rd Quadrant is the most desirable followed by a bunch of receipt points in the 2nd quadrant while Mahwah, NJ in 4th quadrant is the least desirable.

        We are providing a free trial of our Sendout Analytics toolkit for the current heating season ( 2013-14). The NG Sendout Analytics tool comes with pre-packaged 2 year historic data for majority of pipelines. please sign up for the trial.

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        Natural Gas Consumption Stack

        Changing Profile of the Natural Gas Consumption Stack

        There are multiple users of Natural Gas. The June 2013 Natural gas consumption stack is shown below. This is also called as Storage season Consumption Stack, the time when NG is pushed into storage by utilities.

        Power Generation is the largest component while fertilizer production is close second. Water heating, C&I applications are much lower while NGV constitutes a small 0.2 %. Natural gas is on margin for power production during summer, and is priced as a heat rate binary option.

        heat rate  = (Power price at ISO per MW / Natural gas price per MMBTU )

        if the heat rate crosses the fixed cost barrier + small variable cost barrier, the option comes to life and power is produced.

        The Jan 2013 Natural Gas consumption stack is shown as below, also called as Heating Season Consumption Stack.

        Winter Heating constitutes around 51 percent use of Natural Gas as expected. Nitrogenous Fertilizer Production and Power generation are both close second , while again NGV is a tiny 0.2 %. LDC's have firm supply contracts over the interstate pipeline so that they get the first way of right in case of increase in Residential and C&I demand. NG demand for heating is mainly determined by weather. colder the weather , higher the consumption.

        The April 2013 consumption pattern is shown below. April is also called as Shoulder Month.

        Consumption for heating applications has gone down and consumption for Power Generation and Fertilizer Production is going up. NGV component remains almost the same.

        The Annual consumption pattern is shown below.

        Heating application and Fertilizer production are neck to neck at 30% while Power Generation is close to  40 %. These 3 are the 3 major components. NGV is a small sliver at 0.1%.

        Generation Stack at PJM during Winter & Summer

        What is the mix of Generation Fuels used during Winter months ?

        What is the mix of Generation Fuels used during Summer months?

        In order to answer the question, I have used Jan 2013 PJM bid data set as representative of the winter and the PJM bid data set for the months of July,August & September of 2012 represent summer months.

        I do know that the data is a little biased and skewed, but will update as and when PJM publishes the data on their website.

        As expected Natural Gas leads the pack, though by a slim margin, with good old coal following closely. Wind is competing with Heavy Oil, Land filled Gases (LFG), Light Oil, and Waste Coal. Nuclear is a distinct third at 10%. The new kid on the block is Battery. Stasis Energy LLC, a startup based in NYC is one the players in this space. This space is supposed to grow at a fast clip.
        Hope NG keeps up the good work and does not get bogged down by supply issues.

        Demand Response Market Analysis : Incentive based behavior of Market Participants

        FERC ruling 745 dated March 11th 2011, expanded the Demand Response Market Size considerably. Until then Demand Response Market was held back.

        Before FERC ruling 745, payment for demand response was based on a deterministic option pricing model where the strike price was the retail power price paid by demand response participant.

        This is a Classic binary barrier option where the option was in the money only when the peak power price crossed the retail price barrier.

        The retail power price ranges anywhere from 12 cents to 16 cents per kw for peak hours.That works out to $120.00 to $160.00 per MW of price barrier. This was a huge barrier to cross hence demand response market was muted. Revenue was limited.

        however FERC ruling 745 changed the landscape completely.The demand response market participant gets paid the full LMP price but with a caveat, the threshold price.

        Demand Response is now modeled as a Classic Binary option. All Demand Response transactions above the threshold are valued at full market LMP price, while those below the threshold are valued at zero. The upside potential is as good as those Generators who supply power into the grid. One can now think of $1000.00 per MW which is upper cap set by an ISO.

        Power Generators?.. Are you satisfied with your Bids ( $ / MW / Hour ) ?

        Generator Bidding Profile:
        Majority of the Generator's bid real time into the ISO ( Wholesale Power Markets).Generator's buy transmission rights called as FTR's either at the monthly auction or the annual auction.Generators bid on different FTR's to reach a given point. There as plenty of generators pushing power in real time onto the grid. The Generator stack for summer is shown below.

        with the bold text in the example below:

        The Winter Power Generation Stack is shown below :

        There are plenty of generators pushing power into the grid. A generator needs smart bidding, while bidding into the Real Time market. check out a real time $/MW/hour bidding profile which leaks revenue. 60% of the time, the generator is bidding below cost.

        check out a sample bidding profile ($/MW/hour which generates revenue.

        How is your Real Time Bidding profile ? 

        Make your bidding profile work for you. 

        Solution : ESS by KW Energy

        Using historical forecast data, actual data and analytics, ESS can provide you with a Real Time Hourly bidding profile that will improve your supply strategy and revenue.   

        please contact KW energy for arranging a trial. 

        Contact Information :

        Parag Patil
        KW Energy
        Ph : 920-883-7966

        email :

        Trading Brent : the Crude Oil Benchmark

        Brent is one of the oldest price benchmarks. Brent crude, sourced from the North Sea is a mix of  BFOE crudes namely Brent, Forties,  Oseberg & Ekofisk . Delivery of Brent is at Sullom Voe , an island near Scotland.

        The February 2014 contract is currently in the last few days of trading at ICE. A major physical index that effects Brent is Dated Brent. Dated Brent for the month of January has been published as of the 5th of Jan 2014.

        The February 2014 contract settles daily to the Brent Index price published by ICE. 
        (Intercontinental Exchange)

        Strategy : 

        • Long Brent Index  
        • Long @ Tetco-M3
        • Long @ Algonquin
        • 20 Winter Business days


        Returns volatility of Brent Index is really low as compared to NG basis spread returns.

        However Long Brent Index Strategy being In the Money is lower as compared to that Tetco-M3 & Algonquin spreads.

        NGV Consumption Pattern

        Comparing NGV consumption pattern to Residential space heating pattern.

        One of the latest entrants on the consumption side has been NGV and has a tiny share of 0.2 %.  We will look at NGV's running on CNG. NGV consumption is shown below.

        Compressed Natural Gas (CNG) is nothing but the same methane gas that we use for space heating but under more pressure. A light motor vehicle (NGV) has an annual estimated mileage of 12000 miles  & EPA estimated mpg of 25/40 ( city / highway). CNG when used as transportation fuel is measured in GGE (gas gallon equivalent).  

        GGE was invented to facilitate easy comparison with the current dominant automobile fuel (gasoline) which is sold in gallons. 

        It is easy for MPG comparison. 

        MPG of a NGV to MPG of a light motor vehicle running on gasoline. 

        But what is shown below is comparison of CNG to (NG for heating). The same piped Natural Gas that heats our homes. NG for heating is measured in Dth ( Dekatherms).

        This makes more sense and is more intuitive.

        NGV consumption Statistics
        1 year mileage = 2000 miles
        yearly consumption = 369 GGE
        1 GGE = 1.14 therms
        370 GGE = 42 dekatherms ( Dth)
        Dth / month = 3.508 Dth

        EIA data on the monthly amount of Natural gas consumed (Dth) by residential rate class customers per month is given below. The number of Residential Rate class customers in NY state is provided by NY State Dept of Public Service:

        Residential Customers
        New York State

        Monthly EIA residential consumption data for the year 2012 in NY state.

        month Monthly MMBTU Average Monthly MMBTU / Customer Monthly Dth / Space Heating customer Monthly Dth/ NGV customer
        01/01/12 65,085,000 15 15 3
        02/01/12 57,434,000 13 13 3
        03/01/12 37,890,000 9 9 3
        04/01/12 26,483,000 6 6 3
        05/01/12 15,246,000 4 4 4
        06/01/12 10,698,000 2 2 4
        07/01/12 9,058,000 2 2 4
        08/01/12 8,757,000 2 2 4
        09/01/12 9,948,000 2 2 4
        10/01/12 17,815,000 4 4 3
        11/01/12 43,367,000 10 10 3
        12/01/12 55,110,000 13 13 3

        A NGV customer has a profile similar to a residential rate class heating customer, who uses Natural gas for space heating and water heating.