The Model Portfolio for NYMEX Natural Gas
Introducing new alerts to target opportunities for forward natural gas hedging.
We are proud to announce a new feature at the Energy Buyer’s Guide — The Model Portfolio.
This will be a regularly updated medium for Pinebrook Energy Advisors to notify subscribers about opportunities for end users to secure future natural gas costs. We will issue alerts through the Substack platform outlining the specifics of each action and updating the forward position of the portfolio. We anticipate most alerts to be triggered by perceived market opportunities, but we will also take proactive steps to avoid market risks when necessary.
Below are the answers to some questions that we anticipate, but if anything is still unclear, please feel free to reach out directly.
Should these alerts be treated as specific recommendations?
No. This is not a platform where we would make recommendations for any person or entity to enter into any sort of a financial transaction.
The actions taken by the Model Portfolio are hypothetical in nature and are meant to mimic the more specific advice given within an energy management engagement. Think of the model portfolio as a “peek behind the curtain,” scratching the surface of the robust advice that we give to our clients.
Every entity has its own goals and objectives that should be considered in outlining a specific and actionable risk management plan. Pinebrook Energy Advisors assists our clients in developing these plans in order to strike an appropriate balance between remaining open to future opportunities while still safeguarding against market risk and uncertainty.
Will this be available to all subscribers?
This feature will be reserved for Market Participant Tier subscribers only.
We view The Model Portfolio as the most proprietary content to date that is being published to The Energy Buyer’s Guide. While not specific in nature, this will be a medium in which we communicate our forward view of the market at a level of detail that is typically reserved for our full-service energy management clients.
How will this be structured?
The Model Portfolio will be specific to NYMEX natural gas and cover the first 24 months on the forward curve at any given point. All “purchasing activity” in the Portfolio will be expressed in percentage terms, so all forward months covered in the program will have a coverage level of 0-100%, with 100% representing a hypothetical end user’s full targeted position for a given month. As such, we will generally make every effort to reach 100% for each month prior to delivery.
For example, if The Model Portfolio currently holds a 50% position for July 2025, this would parallel an end user with a targeted coverage level of 80,000 Dth holding a fixed position for 40,000 Dth of natural gas volume for that month. Between now and the expiration of the July 2025 futures contract, we will seek opportunities to increase coverage for that month to 100%, reflecting a full targeted position for the hypothetical end user.
How will this be communicated?
When taking action, we will send a message to subscribers alerting them to the activity. This alert will be posted on The Energy Buyer’s Guide and be accompanied by a slide deck outlining the specifics of the activity and documenting the supporting rationale.
What method will you use to track the “transactions”?
We will assume that any purchase made by The Model Portfolio is executed at the midpoint of the trading range during the hour following the alert. This will keep our assumptions “fair”, reflecting a price that we could realistically achieve in an actual transaction. As a position is built, we will keep track of the weighted average of all transactions until reaching the final position prior to delivery.
Will The Model Portfolio ever “sell” a position?
No. This is meant to mimic the “buy only” strategy employed by the vast majority of North American natural gas users that we have advised through the years. Once a position is established, it will never be unwound.
How will the success of The Model Portfolio be measured?
We recognize that comparing a fixed forward position to the market price is often the sole measure of success or failure of a forward hedging program. While we will certainly compare all of our positions to the market price, we don’t believe that methodology is appropriate for most end users engaged in forward hedging activity.
It is generally not fair to compare a forward position for a given month built over time as part of a “buy only” strategy to that contract’s final settlement price. The market price is only a valid benchmark if the alternative to the activity taken was to do nothing and remain fully exposed, which is typically not a realistic option for most end users. Those engaged in this type of risk management program value price certainty for capital planning, budgeting, and upside risk avoidance, and are typically bound to minimum coverage levels for those purposes.
Instead, we’ve found a more appropriate method of benchmarking and judging a strategic forward purchasing program is to compare the results to that of a systematic program that buys an equal volume of gas indiscriminately at regular intervals. By strategically making transactions informed by our unique blend of fundamental and technical market analysis, we seek to achieve a more favorable final result than what would be achieved by this type of systematic, thoughtless program.
For the purposes of The Model Portfolio, we’ll refer to this systematic approach as “The Dummy Hedge” and utilize the Dummy Hedge results as the primary benchmark used to judge the success of the program.
How will the Dummy Hedge be derived?
For our purposes, the Dummy Hedge will add an equal proportion the forward coverage for each of the next 18 NYMEX contract months on the trading day closest to the 15th of each calendar month. For example, on February 14, the Dummy Hedge will fix 5.6% of each NYMEX contract from March 2025 through June 2026 at that day’s settlement price.
This means that prior to delivery, each contract in the Dummy Hedge Portfolio will reach a 100% coverage level at an average of its daily settlement prices on the 15th of each of the preceding 18 months.
When will this start?
We will be rolling this out during the first half of February 2025 with the first round of purchases. The Dummy Hedge for the next 18 months will be determined in arrears and will have the advantage of taking action during the low price environment of 2024. Since we will be establishing the initial Dummy Hedge retrospectively, it will reflect these low price levels, setting a high bar for The Model Portfolio’s early performance comparisons.