Volatility has returned to European natural gas, driven in large part by a wave of new investors who bet that prices will fall.
The turbulence started this month with prolonged outages in top producer Norway, ending a long period of calm. The supply concerns sent speculators who had bet on gas declining rushing to buy futures to cover their positions — called a short squeeze — which exacerbated the price moves. Gas rose as much as 30% on June 15 and fell more than 20% the next day.
Lured by the record profits like those seen last year, some funds that aren’t regular gas market participants likely entered into trades which quickly soured, according to brokers and traders. Total short positions held in the region’s gas futures have surged to the highest in 15 months. Similar bets by speculative investment funds have hit unprecedented levels.
“Some people thought they could make a lot of money given where prices had been, but there was an exaggeration of what this really meant for the gas market,” said Ed Morse, global head of commodities strategy at Citigroup Inc. “Natural gas markets have proven to be a trap for both experienced and inexperienced traders.”
The deluge of short positions is creating plenty of risk, especially if investors are forced to cover their positions again in the event of more supply disruptions or heat waves in Europe and Asia push up demand.
The market may also have to deal with heavy gyrations for a few more years. Some of the world’s largest gas producers have warned that Europe will remain prone to volatility until a new wave of supply, due around 2026, eases the tightness left by Russia’s cuts. That means a potential for sharp moves both upward as well as downward.
The recent “short-covering-driven rally in European natural gas prices illustrated how quickly prices can move when triggered by unforeseen events,” Goldman Sachs Group Inc. analysts led by Samantha Dart said this week.
Fundamentals don’t seem to justify the wide price swings as physical markets, where real gas shipments are bought and sold, are displaying a sense of calm. Europe remains well supplied despite the Norwegian outages, and is able to comfortably cover currently lackluster demand. Inventories too are fuller than normal.
Liquidity has also strengthened, which typically keeps prices relatively stable. Aggregate open interest on Title Transfer Facility futures have rebounded to levels last seen in March 2022. Trading volumes have also surged.
But prices continue to whipsaw, and some investors are putting the blame on speculators.
They “have been more systematic fast money and are less asset-backed,” said Benedict Williams, a trader at Onyx Commodities Ltd in London. “Many firms heard of bonanza years for gas traders and were keen to get involved.”
--With assistance from Elena Mazneva.
Author: Yongchang Chin, Priscila Azevedo Rocha and Anna Shiryaevskaya
