23-Hour Gas Market Swing Means Sleepless Nights for U.S. Traders

Welcome to the new world market for natural gas, where computers never sleep and, apparently, neither do traders.

With U.S. liquefied natural gas exports set to surge by almost 80 percent in 2019, traders in America face a new reality: expansion exhaustion. As more and more international players participate in U.S. gas markets, the price of market security is eternal vigilance.

John Kilduff, a New York-based hedge-fund manager, has learned that you can’t rest on the increasingly volatile U.S. Henry Hub gas market. On Nov. 14, Kilduff logged on at his usual 3 a.m. Eastern time and, instead of being able to log off again and catch a nap before his normal workday, he watched prices jump to a four-year high in just two hours.

“This is a 23-hour-a-day market now, and you have to be on top of it,” Kilduff, a partner at Again Capital LLC, said in a telephone interview.

In 2018 so far, with gas increasingly seen as a cleaner alternative than coal at a time of global warming, trading volume of benchmark U.S. gas futures is up 15 percent in Asia and 25 percent in Europe.

Natural gas trading went electronic in a big way just under two years ago, when the New York Mercantile Exchange commodity pits in lower Manhattan were shut down, eliminating the rings of buyers and sellers flinging their orders on cards to goggle-wearing middlemen whose aprons were physically attached to the pits.

Taking over was CME Group Inc.’s Globex electronic system, at a time of dramatic change in the U.S. energy picture. By that point, the shale boom had begun greatly boosting the amount of U.S. natural gas produced. Meanwhile, Cheniere Energy Inc. had successfully started up the first liquefied natural gas export terminal in the lower 48 states able to send cargoes worldwide on supertankers. A record 32 tankers left U.S. LNG terminals last month.

With U.S. gas increasingly becoming a global fuel, Kilduff is among a growing group of Americans now finding themselves glued to their electronics, struggling to keep up no matter the hour. “I blame the millennials that have come in the market for that primarily,” Kilduff said, jokingly. “Look at the rise of electronic trading.”

Trafigura Group Ltd., the world’s top independent LNG trader, reported Monday that its delivered volumes of the fuel jumped 22 percent in the year ended Sept. 30 from a year earlier, driven largely by rising sales in China and South Korea.

Significant Upturn

All of that has led “to a significant upturn in hedging interest from Asia and Europe,” Owain Johnson, managing director for energy research with CME, said in an emailed statement. As a result, he said CME has “worked closely with customers and market participants to grow on-screen and overnight liquidity in our natural gas futures markets.”

It’s a shift that’s also helped turn Henry Hub, the Erath, Louisiana, benchmark for the Nymex futures, into the most actively traded gas contract in the world. The irony, traders say, is that record production in Pennsylvania and the Permian Basin in West Texas has flooded the country with so much supply it squashed U.S. gas price volatility to a record low this summer.

Prices were caught in a narrow trading range for months when they suddenly jumped last month, catching traders by surprise. The moves last month triggered margin calls, forcing some hedge funds to close short positions and forced OptionSellers.com to liquidate its book. The resulting increase in volatility also prompted CME to boost margin requirements, requiring traders to hold more cash to trade gas futures.

Surging Volume

In the Asian and European hours, the volume of gas futures traded surged to about 257,000 contracts on Nov. 14, eclipsing the daily overnight average of 33,000 for the first 11 months of the year, according to CME.

Whereas moves of a nickel or a dime were considered sizable just a few months ago, daily swings are likely to stick around the 30 to 35 cent range for a while this winter, said Kyle Cooper, a Houston-based consultant at Ion Energy Group LLC. He gets his daily note out to clients each morning by 5 a.m. central time, taking into account the overnight forecast and early reaction. “I do know many are watching the overnight markets and trading,” he said.

Gas’s bigger price swings are also drawing in more algorithmic trading around those overnight forecasts whereas some trading shops, such as smaller hedge funds, stay out of those premarket hours altogether because of the risk, according to traders.

Kilduff starts his trading week on Sunday night when electronic trading opens. He goes to sleep at 8 p.m. to get in enough hours to be alert in the dead of the night. The two 36-inch screens and the lights are bright in his home office. And he insists he’s not going at his job bleary-eyed.

“I’m very blessed to have the ability to nap,” he said.