Jan 28 (Reuters) - U.S. natural gas futures soared
over 70% during the last half hour of trade on Thursday and
closed up 46% in their highest daily percentage gains on record.
The move puzzled a number of market-watchers, who struggled to
explain what could have caused such a spike.
The answer lies in the low-volume action because Thursday
was the last day of that contract's life - when very few buyers
would be willing to take a position as most had already moved on
to other contracts. These occurrences are becoming more common,
though usually not on the order of what happened Thursday.
"Gas contracts rolling off the board have gained an average
12.1 cents in 12 of the past 14 months on their final trading
day," analysts at EBW Analytics Group said.
Thursday's move was even more outsized. Prices rose from
$4.84 per million British thermal units (mmBtu) at 2 p.m. EST
(1900 GMT) to a high of $7.35 at 2:14 p.m. before settling at
$6.27, the highest close for the front-month since October 2021.
Eli Rubin, senior energy analyst at EBW said Thursday's
"price action appears suggestive of a large player getting
caught short and losing big." He did not hear of any specific
firms caught short.
On the New York Mercantile Exchange (NYMEX), all natural gas
contracts not closed at expiration go to delivery at the Henry
Hub natural gas storage facility in Louisiana. As of Thursday,
there were just 620 February contracts outstanding - compared
with more than 276,000 outstanding March contracts at present.
However, total volume traded in February futures on Thursday
was just 7,182 contracts, versus 193,252 March contracts,
according to NYMEX. About 2,874 contracts were traded during the
last 30 minutes before expiration at 2:30 p.m. EST (1930 GMT),
according to data provider Refinitiv.
That is a miniscule amount of trading, and the volatility it
caused prompted NYMEX to halt trading briefly 12 times through
circuit breakers meant to keep markets orderly.
"Short sellers may have gotten squeezed out ahead of
February expiration," said Edward Moya, senior market analyst at
OANDA. "Many hedge funds were betting gas would go up as frigid
weather sent demand soaring, but money managers were short."
Short sellers generally borrow contracts from brokers and
sell that gas when prices are high. They hope to profit by a
decline in prices in the future. However, if prices rise, it
forces short sellers to pay more for the gas then they received.
When the contract is about to expire, short sellers can get
squeezed into buying gas at any available price to cover their
obligations in a very thin market with little gas available -
making it risky to remain short on expiration day.
CHANGE IN DEMAND FORECASTS
Fundamentals played a small part in the action as well,
On midday Thursday, new weather forecasts projected even
colder temperatures than previously expected for the next two
weeks - pushing utilities to take more gas from storage, and
threatening tighter supply.
"Upward price pressure during the close on contract expiry
days has become increasingly common, though it usually only
moves prices by a few cents," analysts at Goldman Sachs said,
noting "This can become a more frequent concern for producers
with hedging exposure, especially if the hedges are priced using
the expiry settle."
(Reporting by Scott DiSavino
Editing by Marguerita Choy)