From Bloomberg:
Trading patterns in natural-gas futures are fanning speculation of a repeat of the collapse four years ago of U.S. hedge fund Amaranth Advisors LLC.
The premium for futures expiring in March 2011 over the April 2011 contract surged to 43.3 cents per million British thermal units June 15 on the New York Mercantile Exchange, the highest level since Feb. 19. The spread was 24.8 cents per million Btu as recently as the end of last week, before jumping more than 50 percent on June 14. The rally came even as U.S. inventories rose to their highest level for this time of year since at least 1993, when the government began collecting data.
“This is peculiar behavior given that supplies are currently building at a comfortable pace,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania, wrote in a report yesterday. “We haven’t seen these particular spreads behave in such a manner since a prominent natural-gas trader morphed a $9 billion hedge fund, Amaranth, into a $3 billion fund in August 2006.”
Greenwich, Connecticut-based Amaranth collapsed after losing about $6.6 billion on wrong-way trades in natural-gas futures. It had controlled more than half of the U.S. market for the commodity before it failed, according to a Senate report from June 2007. Amaranth agreed last August to pay $7.5 million to settle allegations from U.S. regulators that it tried to manipulate the market for natural-gas futures.
Winter-Spring Bridge
The March-April 2011 spread, a benchmark relationship because it covers the period from winter to spring, surged as much as 134 percent this month, according to data from Nymex. An increase of the March premium over April may signal speculators are anticipating tighter winter supplies, which would drive prices higher.
“The rally of the spread in such a short period of time indicates that something besides fundamental data is driving it higher,” said Carl Neill, an energy analyst at Risk Management Inc. in Chicago. “Some big specs were really on the wrong side.”
Trading volume for the spread jumped to more than 8,000 contracts on both June 14 and June 15, compared with an average 2,604 lots last week, Nymex data show.
Traders may also be anticipating the U.S. moratorium on offshore drilling in the Gulf of Mexico following the Deepwater Horizon rig explosion will cut gas supplies, Schork said in a telephone interview yesterday. Alternatively, it may be the result of a single speculator taking a larger-than-normal position contrary to the consensus, he said.
Wrong-Bet Possibility
“As this trade continues to decouple, then Deepwater Horizon is indeed a paradigm shift,” Schork said. If the spread reverts, “then the fundamentals haven’t changed and we had a lot of people making a bet and it was a wrong bet,” he said.
In September 2006, when Amaranth had to reverse its trades, the March-April spread tumbled to as low as 42 cents per million Btu from as high as $2.51 in August. At the time, the spread measured the difference between March 2007 and April 2007 prices.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profit from speculation on whether the price of assets will rise or fall.
Nymex natural gas for July delivery rose 7.5 cents, or 1.5 percent, to trade at $5.053 per million Btu at 10:25 a.m. London time today, after tumbling 21.1 cents yesterday. Front-month gas futures have declined 9.3 percent this year.
To contact the reporters on this story: Alexander Kwiatkowski in London at
akwiatkowsk2@bloomberg.net; Stephen Voss in London at
sev@bloomberg.net.
More on natural gas:
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Veteran energy analyst makes BIG contrarian call on natural gas
Energy guru Schork: "We're at the make or break point for natural gas"
