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European gas market ponders a week of unparalleled movements


Traders reflect upon most volatile trading week in history

Stopping-out, illiquidity, margin calls, fundamentals mulled

Ongoing concerns about credit defaults, collateral sourcing

  • Author
  • Neil Hunter    Zsuzsanna Szabo    Mario Perez
  • Editor
  • Alisdair Bowles
  • Commodity
  • Energy Transition Natural Gas Metals Shipping

The Oct. 6 trading day was a historic day on the European wholesale market, and one which is likely to become a reference point for risk managers for years to come.

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In unprecedented scenes dwarfing anything the market has seen before, not only were new price records set for day-ahead, front-month and front-quarter products, but intraday volatility also leapt well outside all of traditional bounds.

According to trade data supplied to S&P Global Platts, the NBP November contract peaked at 404.375 pence/therm at 0830 GMT. It had begun changing hands just above 300 p/th earlier in the day, and had fallen back below this threshold by 1130 GMT.

The Platts Market on Close assessment for November NBP on Oct. 6 came to 273.75 p/th, reflecting the value of the contract at precisely 1530 GMT. It had fallen by 24.725 p/th on the day, after having gained 56.025 p/th in a single day during the previous session; a new day-on-day record by some considerable distance, and arguably setting a foundation for what was to come. The Oct. 6 assessment in fact ended a run of nine consecutive daily increases on the contract.

Outside of the UK's On-the-day Commodity Market (OCM) balancing platform, gas has never before been traded at these levels, not even for a day-ahead contract. The previous record for the NBP spot was 230 p/th on March 1, 2018 during the infamous "Beast from the East" weather system. The OCM record currently stands at 535 p/th for NBP within-day gas, set early that morning.

To further illustrate the magnitude of the event, it would have cost a trader 45.85 p/th to purchase the entire Winter 2021 contract on March 2, 2018. while on May 1, 2020, at the height of the first coronavirus pandemic wave, it would have cost just 37.20 p/th to purchase the Winter 2021 product.

A German gas trader told Platts on the day that the moves seemed to reflect "huge liquidity issues across the market", adding that "you can see it in the trading behavior."

Indeed, had a utility purchased November for 400 p/th at the intraday peak, the participant on the sell side could have be a trading house, for example. The non-physical participant could have made 100 p/th by buying back the position later on, but possibly from another non-physical trader, meaning that the physical supply-side would ultimately not have changed, despite the original buyer securing their position. If this cycle is repeated, then a market event known as a "blow-off top" is prone to occur.

Market sources also reported to Platts that the rally could have been fueled by future supply tightness, the "stopping-out" of short positions from algorithmic traders to prevent further losses, and what are known as "margin calls" possibly being realized, which concern trading collateral and credit terms.

Effect and cause

Mainstream media has predominantly reported that assurances from Russia's President Vladimir Putin that Gazprom could send more gas to Europe this year sent prices tumbling after the spike.

"The comments by Vitaly Markelov about strong domestic gas demand meaning that Russia was unable to pump more gas to Europe prompted a 'short squeeze' in European markets," a UK gas trader said.

"Then Putin's comments about Russia pumping more gas to Europe to alleviate the supply shortage caused the market to subsequently drop: Good cop, bad cop," the trader added.

However, other market participants have noted how the spike had more or less been resolved by the time Putin actually spoke, which could lend itself to another explanation. Reports of record supplies to Europe, and information on volumes shipped via Ukraine, began to surface on Russian newswires from 2:50 pm Moscow time (1150 GMT).

Also considering sentiment from Russian as a factor, Shell-owned renewable energy technology platform Limejump waded into the debate on Oct. 7.

Lead Commercial Analyst Matthew Fitt said: "Price rises mean that anyone with a short position is out of the money and it is a losing trade. When the losing trade is made on margin i.e. with money that you do not actually have, your broker can call you to ask for you to deposit more money."

"In extreme cases they can stop-out your position if you cannot meet the margin call, which adds to the momentum of the price move."

Fitt also attributed the spike to the recent failure of UK retail energy suppliers as generating a new requirement for immediate hedging, with the Ofgem-appointed Supplier of Last Resort now taking on the customers of these failed businesses.

"The Supplier of Last Resort process is used when a retail energy supplier goes bankrupt," Fitt said. "When the customers are awarded to a new supplier, the volume they expect the customers to use has to be hedged from scratch. With the [retail] price cap, and in a rising wholesale market, this will be done at a loss."

"The delta between the price cap and the actual hedged costs can be recovered. This sees significant buyers in the market," Fitt added.

Margin calls

With pressure on buyers intensifying, there have been reports of margin calls being made on purchasers by trading exchanges as prices rise, whereby platform users would be required to post a greater level of collateral to secure future purchases, or face credit default. This could prompt market participants to close open positions on either side to free up this reserve, while also constraining the amount of free capital a trader has available to them.

"As prices rise, the clearing house announce margin updates," a clearing house source told Platts. "In any market, for any commodity, as the price goes up, the clearing house will, based on its risk models, raise margins, because essentially it stands between the seller and the buyer."

"We take more margin to ensure that if either side of the deal falls through, the clearing house is there in the middle to act as the buyer or seller of last resort."

The source said that the forced closing of positions was not within their company guidelines.

"When markets are going up or down, we don't want to do anything that is going to make the situation worse, so risk models are designed not to do that; they are designed to try and make the system safer."

With the market price now having stabilized, market participants have voiced their concerns to Platts about future collateral concerns.

"It's been a real roller-coaster week," the UK trader said. "If it continues to drop it will open up a fresh set of headaches though."

"There'll be a lot of companies in trouble with this volatility," a German power trader said. "Even with prices moving back to 'normal' there could be problems next year in the case of producers or consumers not paying."