Closing the Gap - Futures Edition

WTI Crude Oil and Nat. Gas

| Dec 19, 2014
Up Next
    Closing the Gap - Futures Edition

    WTI Crude Oil and Nat. Gas

    Dec 19, 2014

    In this segment, Pete Mulmat (the director of education from the CME) discusses the west Texas intermediate crude oil (WTI) and natural gas spread. He begins this segment looking at the energy spread, specifically that between natural gas versus crude oil. He delves into what drives this market and the opportunities especially in volatile markets. First they look at a visual representation of the spread by pulling up a chart of the two and overlaying them on a grid. It becomes apparent that the spread has recently narrowed.

    Pete goes on to explain that the energy production boom in the United States over the last seven years has led to a very interesting and dynamic relationship between natural gas and crude oil. From the vantage point of units of energy, the price spread between natural gas and crude oil is significant. This is especially true with natural gas.

    The British thermal unit (BTU or Btu) is a traditional unit of energy. It is the amount of energy needed to cool or heat one pound of water by one degree fahrenheit. When trading energy futures, this in an important metric to be aware of as it is a way to develop potential pairs trades. In BTU terms, $1 of natural gas can obtain 240,000 units of energy (at a spot rate of $4/million BTU or Btu’s) compared to a $1 of WTI oil which garners 100,000 units of energy at a spot rate of $65 per barrel. This is a whopping 240% energy content price gap, even after the polar vortex and deep freeze have raised natural gas prices.

    Before 2005, a Btu price gap did not exist, and there was little direct competition between crude oil and natural gas as a source of energy. Structural change in the natural gas market is resetting conditions in a way such that the energy price spread between natural gas and crude oil may close faster than expected.

    So, if we want to trade these two sources of and energy and the changing price dynamic between them, Pete explains that we can compare them based on btu notional comparison. To determine the value of the wti/natural gas, we calculate the pair by dividing the notional value of crude future by the notional value of natural gas. Then we will multiply both by a predetermined percentage of the IV differential. This gives us an approximate IV adjusted futures pair. Peter finishes the segment by saying that by using future options based on delta equivalent, you can get to a smaller percentage of the total risk while also creating positive theta decay.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

    More like this

    tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on

    tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

    tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

    tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

    © copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.