What Would Happen to Henry Hub NG if China Attacks Taiwan?
Since last week the media has published videos and Chinese politicians' statements about the Chinese military drills near Taiwan. Taiwan has also conducted military exercises and preparatory work with the civilian population in the event of an attack. On August 3, the NYT, quoting Chinese state media, published an article about the following Chinese military drills scheduled on August 4 and a place of exercises. Chinese media offered five swaths of the sea surrounding Taiwan. If true, it can be a hostile act, possibly igniting conflict between China and unrecognized Taiwan. Both countries are essential for the world economy, meaning the conflict would affect markets. I hope it will not happen. However, this risk urged me to start a series of posts 'What would happen to asset_name if China attacks Taiwan?'
A brief: China is the second economy in the world by nominal GDP. China is the main trading party for the US, Europe, and many other countries and regions. The country is also a giant gas consumer and LNG importer. According to the EIA, the US was the fourth LNG supplier in China in 2021.
Henry Hub natural gas is a local benchmark. However, its price partly depends on the US LNG trade achievements and obstacles.
In case of a conflict, it would halt LNG export to Taiwan. I estimate Henry Hub participants would also wait for sanctions on Chinese banks or even prohibition of gas trade with China. These would drive expectations of short-term oversupply in the US local market resulting in a sharp price drop of natural gas in America.
In the end, some LNG exporters would change their export from China and Taiwan to other Asian countries, e.g., South Korea, Japan, and India. Other LNG sellers would divert shipments to Europe, suffering
TFM1!
, bringing relief to Europe in terms of volumes and price.
The main shock could happen later. Possible export and import prohibitions between China and the US with Allies would bring manufacturing decline, pushing gas demand lower and cutting its price. It would get a more sustained bearish effect on Henry Hub prices than temporary shipment redirection.
With the technical analysis help, I estimate a first bearish move could put prices down to a support level of $6.4/MMBtu. Then, in case of sanctions, it would go down to the next support of $5.5/MMBtu. It is hard to forecast how long Taiwan can fight and what sanctions will be imposed. I doubt that sensitive restrictions would be imposed during the first days. I also doubt that the US will impose harsh O&G sanctions if China takes over Taiwan quickly. I expect it could happen a month after the start of the conflict. Breaking $5.5/MMBtu through, it would drop to the last winter's $4/MMBtu.
Put options are the best instruments for shorting HH on the potential conflict. For the first target of $6.4/MMBtu, the option with the corresponding strike and expiration in September could suit well. For the following targets of $5.5/MMBtu and $4/MMBtu, I suppose corresponding strikes with October and November expiration.
For futures traders, I guess a stop-loss is $8.5/MMBtu. The stop-loss is ugly and huge in today's Henry Hub Volatility environment. Timing for the trade matters much. I believe that options with an end-of-month expiration date could be good. The position holding period is 7 days to next Thursday. If the bad doesn't happen, it is better to close the long put or futures short position. However, we do not know the date. Solely China knows the exact date if the plan exists. The risk could realize during the next 7 days or be postponed to next month or even later. If the risk realizes later, I expect the same effect on the market, and only target adjustments could be needed.
I wish you peace!
Thank you for your reading, and have profitable trading! Comment your thoughts!
A brief: China is the second economy in the world by nominal GDP. China is the main trading party for the US, Europe, and many other countries and regions. The country is also a giant gas consumer and LNG importer. According to the EIA, the US was the fourth LNG supplier in China in 2021.
Henry Hub natural gas is a local benchmark. However, its price partly depends on the US LNG trade achievements and obstacles.
In case of a conflict, it would halt LNG export to Taiwan. I estimate Henry Hub participants would also wait for sanctions on Chinese banks or even prohibition of gas trade with China. These would drive expectations of short-term oversupply in the US local market resulting in a sharp price drop of natural gas in America.
In the end, some LNG exporters would change their export from China and Taiwan to other Asian countries, e.g., South Korea, Japan, and India. Other LNG sellers would divert shipments to Europe, suffering
TFM1!
, bringing relief to Europe in terms of volumes and price. The main shock could happen later. Possible export and import prohibitions between China and the US with Allies would bring manufacturing decline, pushing gas demand lower and cutting its price. It would get a more sustained bearish effect on Henry Hub prices than temporary shipment redirection.
With the technical analysis help, I estimate a first bearish move could put prices down to a support level of $6.4/MMBtu. Then, in case of sanctions, it would go down to the next support of $5.5/MMBtu. It is hard to forecast how long Taiwan can fight and what sanctions will be imposed. I doubt that sensitive restrictions would be imposed during the first days. I also doubt that the US will impose harsh O&G sanctions if China takes over Taiwan quickly. I expect it could happen a month after the start of the conflict. Breaking $5.5/MMBtu through, it would drop to the last winter's $4/MMBtu.
Put options are the best instruments for shorting HH on the potential conflict. For the first target of $6.4/MMBtu, the option with the corresponding strike and expiration in September could suit well. For the following targets of $5.5/MMBtu and $4/MMBtu, I suppose corresponding strikes with October and November expiration.
For futures traders, I guess a stop-loss is $8.5/MMBtu. The stop-loss is ugly and huge in today's Henry Hub Volatility environment. Timing for the trade matters much. I believe that options with an end-of-month expiration date could be good. The position holding period is 7 days to next Thursday. If the bad doesn't happen, it is better to close the long put or futures short position. However, we do not know the date. Solely China knows the exact date if the plan exists. The risk could realize during the next 7 days or be postponed to next month or even later. If the risk realizes later, I expect the same effect on the market, and only target adjustments could be needed.
I wish you peace!
Thank you for your reading, and have profitable trading! Comment your thoughts!
Order cancelled:
China said it concluded drills yesterday, so I canceled the geopolitical idea. I estimate that the long-term risk of the event exists.
Trade closed manually
