The truth of the matter is that there is a Behemoth out there that was long crude oil against short nat gas (along with short nat gas spreads).
That’s from our good buddy Kevin Muir who, on Tuesday evening, outlined a simple thesis for what’s going on in crude and nat gas.
In addition to everything Kevin spelled out and illustrated yesterday, you also want to take account of the hedging dynamics Goldman described in their post-mortem documenting the likely cause of the most recent leg lower in crude.
Well, in his latest daily note, Nomura’s Charlie McElligott delivers a similar take on the “frightening liquidation of crude oil”.
Like everyone else, Charlie starts by acknowledging the obvious “macro headwinds” which set the stage for the rout. Those macro headwinds include surging U.S. production, a buoyant greenback, OPEC supply that had risen into the Iran sanctions and the cartel’s assessment that demand for their crude will fall in 2019.
After that, McElligott flags “MASSIVE dealer short gamma per dollar move in WTI” and asks if it’s “perhaps Mexico hedge related” before observing that “the ‘patient zero’ stress point looks tied to the unwind of +WTI, -Nat Gas bet gone wrong and now being tapped.” This is the biggest 30d move in the nat gas/crude ratio since May 2012.
McElligott goes on to drive the point home, writing that “yesterday’s tap out liquidation flow in WTI looks to at the very least been exacerbated by the unwind of a long WTI / short Nat Gas spread trade, [as] over the past 12 sessions, WTI is -16.8% while Nat Gas is +51.9%.”
What you’re seeing, Charlie concludes, is an “obvious forced unwind” which hit “DEATH BLOW” levels on Wednesday morning.