Collars aren't costless
In a right-skewed gas market, selling calls gives away too much value
As has been abundantly clear over the last month, North American gas markets are much more insulated from geopolitical risk than oil or LNG markets. But reduced supply and demand elasticity, alongside underinvestment in pipeline and storage infrastructure, mean that domestic supply and demand dislocations nonetheless impact Henry Hub prices more than ever.
And while mild winter reduces demand just as much as cold weather increases it, the impact on prices is asymmetric. When Henry Hub prices fall below ~$2/MMBtu, prices at supply hubs in the mid-$1/MMBtu range approach short-run operational costs, precipitating producer shut-ins. But no similar feedback mechanism governs price upside.
The result, then, is that the distribution of realistic Henry Hub prices is right-skewed. But that right-skew in prices means that using collars to protect cash flows will increasingly weigh on E&Ps’ earnings, compared with not hedging, purchasing puts, or even traditional swaps.
