As Temperatures Drop Hedge Funds Bet on Natural Gas

February 10, 2014 James Heinsman Economic Barometer

Cold Spell Fueling Increased Gas Use

Cold Spell Fueling Increased Gas Use

Much of the United States has been suffering through a long, cold winter, with the end still months away. Natural gas, a prime fuel for heating households has been flowing at record rates to cope with what some are saying was the coldest winter since 1990, the year gas futures came into being.

Speculation that there could be a shortage of natural gas before the warmer days of spring arrive is fueling a surge in prices for gas across the country.

“It’s been a relentless cold,” says Eric Bass, managing partner at Velite Benchmark Capital Management, a Houston gas hedge fund. “This market has slowly started to realize there could potentially be an inventory problem.”

Checks against shortages have been implemented. Dry gas production in the US rose by 25 percent over the last six years using a new technique which releases gas from shale. But due to the severity of the winter demand for domestic gas is catching up to the supply. According to Bentek Energy the US used an average of 102 billion cubic feet per day, a record. That number dwarfs the 65 billion cubic feet per day that is produced.

“If inventories fell below 1 trillion cubic feet there really could be some deliverability issues in specific places,” says Brison Bicerton of Freepoint Commodities, a trading house based in the US.

Some experts say that the price increases that we are already seeing could be at least partially due to rationing.

“We witnessed a marked increase in spot prices for every consuming region—this is new—suggesting that utilities might be rationing limited inventories by purchasing gas off the market,” says Teri Viswanath, gas analyst at BNP Paribas.

Hedge funds have woken up to the possibility that the possible gas shortage could present itself as a money-making opportunity. One method hedge funds can bet on very low inventories is by taking a stand on the price difference between gas delivered in March and in April, when the demand for gas lessens. This however is far from a sure bet: The March-April gas price spread in 2006 led to the $6 billion collapse of the Amaranth hedge fund.

Large changes in prices could spell danger for aggressive traders. Hedge fund managers, however, are happy to have the excitement of speculation thrown at them As Eric Bass, of Velite Benchmark Capital puts it,

“Generally speaking, the more volatility the better. On any given day volatility can be your friend or your enemy.”

Bentek Energy, BNP Paribas, Brison Bicerton, cold, Eric Bass,

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