July 3, 2020

Effects of Harsh U.S. Winter

winterWhen volatility returned to the U.S. natural gas market this winter after years of sleepy trade, the wild price swings created unexpected winners and losers.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 flatlined 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 Januarywith some of their best gains on record.

The sharp price moves have called into question the conventional wisdom that natural gaswould 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 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.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 Canavasio, the New York-based head of trading strategies at Man Investments, which manages about $12 billion.

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