Traders rush to cancel massive Whipsaw gas price bets

(Bloomberg) — Volatility has returned to European natural gas, driven largely by a wave of new investors betting prices will fall.

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Even before the rebellion in Russia sent prices up 8.4%, turbulence was evident with prolonged outages at Norway’s top producer ending a long period of calm. Supply issues caused speculators who had been betting on falling gas to rush to buy futures to hedge their positions – called a short squeeze – which exacerbated price movements. Gas rose 30% on June 15 and fell more than 20% the next day.

Lured by record profits like those of last year, some funds that are not regular gas market players have likely entered into deals that have deteriorated rapidly, according to brokers and traders. Total short positions held in gas futures in the region hit their highest level in 15 months. Similar bets by hedge funds have reached unprecedented levels.

“Some people thought they could make a lot of money given the price situation, but there was an exaggeration of what that really meant for the gas market,” said Ed Morse, global chief strategy officer. commodities at Citigroup Inc. “Natural gas markets have proven to be a trap for both experienced and inexperienced traders.

The deluge of short positions creates a lot of risk, especially if investors are forced to re-hedge their positions in the event of further supply disruptions or heat waves in Europe and Asia driving up demand. The mutiny in Russia will only add to volatility, traders said on Monday.

The market may also face strong fluctuations for a few more years. Some of the world’s biggest gas producers have warned that Europe will remain prone to volatility until a new wave of supplies, expected around 2026, eases tensions left by Russian cuts. This means potential for both up and down sharp moves.

The recent “recovery in natural gas prices in Europe, driven by short hedging, illustrated how quickly prices can move when triggered by unforeseen events,” Goldman Sachs analysts said last week. Group Inc. led by Samantha Dart.

The fundamentals do not seem to justify the sharp price swings, as the physical markets, where actual gas shipments are bought and sold, are showing a sense of calm. Europe remains well supplied despite the Norwegian blackouts, and is able to comfortably cover currently sluggish demand. Inventories are also fuller than normal.

Liquidity has also strengthened, which generally keeps prices relatively stable. Overall open interest on securities transfer facility futures rebounded to levels last seen in March 2022. Trading volumes also increased.

But prices continue to seesaw and some investors blame speculators.

They “have been more systematic quick money and are less asset-backed,” said Benedict Williams, trader at Onyx Commodities Ltd in London. “Many companies have heard of good years for gas traders and have been keen to get involved.”

–With the help of Elena Mazneva.

(Adds Monday’s gas price to paragraph two.)

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