The coldest winter in two decades boosted heating demand to all-time
highs, quickly reduced stockpiles and prompted the kind of sweeping
highs and lows that the market has not seen since shale drilling
began flooding the United States with gas in 2009.
The flat-lined trading of recent years lured trend followers and
global macro funds to place one-way bets on declining prices which
resulted in giant losses this winter as prices spiked.
Meanwhile, smaller, nimble hedge funds who correctly bet that winter
gas supplies would quickly diminish as power generators scrambled to
find last minute supplies, ended January with some of their best gains on record.
The sharp price moves have called into question the conventional
wisdom that natural gas would remain in a narrow range for months
due to ample supply and have left a number of traders and analysts
wondering if the volatility is here to stay.
U.S. natural gas futures prices gained as much as 50 percent this
year, breaking the $6 mark for the first time since 2010, a far cry
from the $2 seen in 2012.
Houston-based Goldfinch Capital, founded by Michael Maggi who worked
with legendary gas trader John Arnold, finished January with a 21
percent gain, its best one-month gain since the 2009 inception of
the fund, sources familiar with its performance said. The fund
manages around $600 million.
Energy-focused hedge fund Lochridge Investment Advisors, which is
also based in Houston and manages about $100 million, gained about 6
percent in January, sources said.
e360 Power, an Austin, Texas-based hedge fund focused on trading
North American power and natural gas with $200 million in assets
under management, was up about 14 percent last month, its principal
James Shrewsbury told Reuters.
Meanwhile, others who either took opposing sides of the trade or had
to purchase gas to deliver lost out.
Michigan-based utility DTE Energy <DTE.N> lost $3 million in the
last quarter of 2013 in energy trading as natural gas prices rose
sharply, it said in an investor presentation on Friday.
Commodity trader Cargill lost $100 million in wrong-way bets in the
U.S. power market, attributed to skyrocketing prices, online
industry publication SparkSpread.com reported on Thursday. A Cargill
spokesman said on Friday that the company "refutes the details of
the numbers shares," but declined to comment further.
All the while, investors have refocused their attention on the gas
market after this winter proved that funds that know the ins and
outs of trading the fuel were capable of making large returns.
They too are watching from the sidelines to see if a few more
quarters of volatility reap some fund managers large profits before
they decide whether to plunge capital into high performers.
"It's not just the fact that we are seeing some interesting results
from managers but it's the prospects of this market going back to
what it used to be," said Osvaldo Canavosio, the New York-based head
of trading strategies at Man Investments, which manages about $12
[to top of second column]
VOLATILITY HERE TO STAY?
One of the sources of big wins or loses is the spread trade.
The prominent bet that created large windfalls for some this year
was that March futures prices would rise against April as heating
demand soared in the last six weeks. The spread, a notoriously risky
bet for gas traders, widened by as much 85 cents from last week to
$1.45 this week after forecasts for more cold weather.
Likewise, April futures widened to a 20-cent premium over October
from a discount a week ago.
The idea that near-term gas is worth more because supply will
resolve itself once winter passes could be a faulty assumption, said
Teri Viswanath, a natural gas analyst with BNP Paribas in New York.
With prices dipping below $4 in the second half of next year,
producers are not incentivized to drill more. And a lack of
additional supply could mean more volatility.
"There's this idea that we'll have a surge in supply and we'll have
no problem in correcting the current imbalance, and that's a risky
bet," Viswanath said.
Another trade used by hedge funds to hazard a guess as to how much
supply will be available at the end of injection season in October
to meet peak winter heating demand in January is the spread between
those two months.
Trading in that spread could cause an instant replay of last month's
move in the March/April spread, brokers and analysts said. The two
spreads are interchangeably known as the "widowmakers" for the steep
losses they have inflicted.
"Now that we've turned the corner from a surplus into a tight
market, you're going to see prices respond to the weather and
unanticipated spikes in demand," Viswanath added.
(Editing by Edward McAllister and
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