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Extreme U.S. winter roils natural gas market, upends some trading strategies

A man shovels snow in the Queens borough of New York, February 13, 2014. REUTERS/Shannon Stapleton

By Jeanine Prezioso

NEW YORK (Reuters) - When 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 January

with some of their best gains on record.

The sharp price moves have called into question the conventional wisdom that natural gas would 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 (DTE) 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.


One of the sources of big wins or loses is the spread trade.

The prominent bet that created large windfalls for some this year was that March futures prices would rise against April as heating demand soared in the last six weeks. The spread, a notoriously risky bet for gas traders, widened by as much 85 cents from last week to $1.45 this week after forecasts for more cold weather.

Likewise, April futures widened to a 20-cent premium over October from a discount a week ago.

The idea that near-term gas is worth more because supply will resolve itself once winter passes could be a faulty assumption, said Teri Viswanath, a natural gas analyst with BNP Paribas in New York.

With prices dipping below $4 in the second half of next year, producers are not incentivized to drill more. And a lack of additional supply could mean more volatility.

"There's this idea that we'll have a surge in supply and we'll have no problem in correcting the current imbalance and that's a risky bet," Viswanath said.

Another trade used by hedge funds to hazard a guess as to how much supply will be available at the end of injection season in October to meet peak winter heating demand in January is the spread between those two months.

Trading in that spread could cause an instant replay of last month's move in the March/April spread, brokers and analysts said. The two spreads are interchangeably known as the "widowmakers" for the steep losses they have inflicted.

"Now that we've turned the corner from a surplus into a tight market, you're going to see prices respond to the weather and unanticipated spikes in demand," Viswanath added.

(Editing by Edward McAllister and Cynthia Osterman)