(Bloomberg)-Urgent call on holiday weekend: natural gas traders need more money, and faster.
The temperature in central America began to plummet. The price of fuel for heating has soared 300 times, reaching a level no one can think of. Later, this proved to be a harbinger of one of the worst energy crises the country has ever seen. In the deadly deep freeze, millions of people were plunged into darkness for several days.
But on Saturday, in a relatively small and obscure world (i.e. the natural gas market), traders were only focused on one very big problem: due to volatility, the exchange required more collateral. Traders must take cash before Tuesday, otherwise they will be forced to exit their positions, and in some cases, they may face catastrophic losses.
The severe situation triggered a frenzy of all-weather meetings. Since Lehman Brothers collapsed in 2008, a group of traders held their first Saturday morning conference call. Monday’s public holiday means the Bank of America is closed, so-desperately money-some market participants turn to European parent companies that can provide services. The so-called margin payment is that they represent the exchange early. Cash came in different currencies, but it succeeded.
Cody Moore, head of natural gas and power trading at Mercuria Energy America, said: “I have experienced a lot of things: the 98 and 99 power peaks in Midwest California from 2000 to 2001
It turns out this is an understatement. In one of the most outstanding weeks in the history of the electricity and natural gas market, natural gas soared to $1,250 per million British thermal units in certain areas, and electricity in Texas soared to its price cap of $9,000 per megawatt hour. The grid operator of the country ordered the largest forced power outage in the country’s history because the cold pushed its system to the brink of complete collapse.
Winners will emerge-like Dallas Cowboys billionaire owner Jerry Jones (Jerry Jones), his natural gas company sells some fuel at a premium. There will undoubtedly be losers. Atmos Energy Corp., one of the largest independent suppliers of natural gas in the United States, said on Friday that it hopes to raise cash after it will spend as much as $3.5 billion to obtain fuel during the freeze. The company said it is “evaluating multiple financing options, including available cash, short-term debt, long-term debt, and equity.” The market may never be the same.
The world of natural gas is dominated by industrial buyers and sellers, trading companies and hedge funds. The action revolved around matching the demand in one corner of the vast US energy network with the supply in another corner. Players are obsessed with the weather that drives demand-air conditioning in summer and heating in winter.
Related: Two hours almost destroyed the Texas grid
Gas trader Paul Phillips and his Uplift Energy team in Denver spent a full week focusing their energy on the large freezing event that has not yet reached Texas. Uplift provides gas producers with charging advice on how to get the best price. It tells the customer to be prepared.
Despite growing concerns, the benchmark New York Mercantile Exchange (Nymex) futures (the deepest and most liquid natural gas market) are relatively stable, at less than $3 per million BTU.
As the name suggests, futures reflect expectations of future supply and demand-in this case, trading lasts until March and beyond, rather than the nearby weekend. Instead, alarms for buying and selling natural gas on the spot market for immediate delivery began to sound.
For example, the spot price of the Oneok Distribution Center in Oklahoma has been slightly but steadily discounted to the New York Mercantile Exchange. It rose sharply on Wednesday, February 10, and closed at $9. They reached $60 on Thursday. By Friday, they briefly surpassed $500, which was a level never thought of before.
Natural gas sales contracts may require buyers or sellers to provide collateral, such as letters of credit, a type of insurance, in case bets are wrong or the company has liquidity problems. Rising prices usually mean that more collateral or margin is required.
But the surge in spot natural gas prices now seen has triggered truly excess demand: According to a trader, a small market participant requiring a margin of $100,000 saw this figure reach $1 million. Larger companies have to look for tens of millions of dollars. Many spot natural gas transactions are conducted through Intercontinental Exchange Inc.’s next-day contract, which increases its margin requirements.
After the market was closed on Friday, shocked traders scrambled to figure out how much additional funds would need to be set aside next week. Some trading companies are very nervous. An executive once said that he was worried that some counterparties might go bankrupt and leave the company to fill positions in the spot market.
As the weather closes, there are more practical considerations. Mercuria decided to reserve hotel rooms for some of its Houston employees so that they can avoid driving in icy conditions. Mercuria’s Moore said: “This is a special moment. Our top priority is to do everything we can to keep the grid running and the gas to flow normally.”
At the same time, critical parts of Texas’ energy infrastructure began to fail. After the liquid freezes in the pipeline, the oil and gas well stops production. By the evening of Sunday, February 14, it became clear that Ercot, which is responsible for the Texas grid, might have to implement a rolling blackout.
Some traders seeking to raise more collateral eagerly took advantage of credit lines, while lenders took action. A person working there said that a bank can provide a $500 million line of credit and set it in place when the market reopens. According to others with knowledge of the situation, other lenders have taken similar actions. A banker said: “No one wants to trade liquidity incidents, so they stepped up their efforts.”
By Tuesday morning last Tuesday, Texas was in an unprecedented energy crisis, and Ercot was unable to restore most of the grid. As the market reopened, some traders liquidated their positions and were unable to make a margin call.
John Kilduff, a trader and founding partner at Again Capital, said: “If you want to play the game, you have to pay.” “This is a mechanism to eliminate excessive speculation.”
For those who are still in the game, the wild ride continues. By Wednesday, spot prices rose at Henry Hub in Louisiana, which is the delivery benchmark for Nymex futures, and Oneok’s price touched $1,250.
Click here to listen to the BloombergNEF podcast about the Texas winter storm
Phillips and his colleagues at Uplift, working from home, saw orders from the Western Rockies as high as $350. He said: “To be honest, I think the highest price possible this week is $20.”
Some of Uplift’s customers are doing everything they can to keep the gas flowing at this point in cold temperatures, and using space blankets and portable heaters to prevent the pipes from freezing. Phillips said: “Some of our producer customers morally believe that natural gas is flowing.”
In Oklahoma, Chris Bird’s company Expnent Energy is adopting similar simple measures, including the use of propane blowtorches to prevent natural gas wells from freezing. In just five days, Exponent’s oil wells in Osage County earned approximately US$3 million in revenue, compared with approximately US$800,000 for the entire year last year.
As people’s awareness of the high price of natural gas increases, even within the natural gas market, people’s anger is getting higher and higher. Some observers questioned why fuel still flows to the LNG export terminal when electricity for millions of Texans is still falling.
“What is happening is disgusting price fraud, which we have never seen since the California energy crisis.” Independent trader John Woods said of spot prices. “Texas should ban the export of fuel.”
On Wednesday evening, Texas Governor Greg Abbott announced in a televised speech that he had stopped shipping natural gas from the state.
This caused a new wave of panic in the market. The dealer frantically asked for clarification on how to execute the order. A trader on the West Coast worked around the clock. He lost $1 million in a matter of minutes. He earlier bought a natural gas swap for $20-essentially betting on the continued supply of Texas. Nervous-later discovered that the price immediately dropped to $12. News of Abbott’s order spread.
During the peak power outage, nearly 4 million Texans were cut off, but on Thursday, Ercot had greater success in reconnecting homes and businesses, and the temperature began to rise. Natural gas supply also rebounded and spot prices plummeted. The Oneok exchange rate fell back to $3.56 on Friday, and Ercot ended the emergency.
Although gasoline prices are almost back to where they started, it may take some time for the full impact of the hurricane to become apparent. Katie Bays, managing director of FiscalNote Markets, said that the hasty containment of Texas exports could undermine people’s perception of the reliability of the future supply of LNG in the United States. Part of the financial losses in the US market may only appear at the end of March and will be settled in February. Kilduff of Again Capital said that severe financial losses may eventually increase barriers to market entry, which in turn may reduce competition.
He said: “We have to see what kind of breaches have occurred.” “This will determine who can stay.”
(Updated details of Atmos Energy’s gas expenditure commitments in paragraph 7)
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