US wet gas volatility rises to record as prices rise globally

Oct. 6 (Reuters) – Volatility in US natural gas futures soared to an all-time high on Tuesday as an energy crisis in major world markets pushed prices higher worldwide.

Natural gas prices are at record levels in Europe and Asia as major markets such as China struggle to find enough fuel to meet demand, which has recovered faster than expected from the coronavirus-induced downturn.

In Europe, prices have risen by more than 500% this year, fearing that the current low storage levels will not be enough for the winter.

That has led to US natural gas futures, which recently closed at a 12-year high of $6.31 per million British thermal units (mmBtu).

While that’s a long way from prices in Europe and Asia, where natural gas is more than five times more expensive, the market has become increasingly volatile as competition for limited US liquefied natural gas (LNG) exports intensifies.

In the United States, implied volatility — a measure of expected market swings — rose to a record high of 122.5% on Tuesday, surpassing the previous record of 117.5% reached in November 2018.

Part of the reason for the wild moves is that commodities companies, hedge funds and other major investors in the market are exposed to unexpected price increases. Companies that bet the wrong way in the markets are sometimes forced to quickly switch positions to cover their losses, further adding to volatility. read more

There have been no recent reports of hedge fund failures, but Statar, which invests in gas, reportedly lost about $130 million. Commodities giant Andurand, on the other hand, has posted strong returns as a result of rising prices.

Competition between Europe and Asia for limited LNG shipments and other energy supplies has led manufacturers to curtail their operations in Europe and led to power crises in China. Global gas prices have risen to record highs of around $40 per mmBtu in Europe and $35 in Asia.

The last time volatility peaked this much in November 2018, gas volume traded on the New York Mercantile Exchange (NYMEX) soared to a record 1.6 million contracts.

On Tuesday, volume on the NYMEX was about 500,000 contracts, slightly more than in the past 30 days, but only the most in one day since last week.

However, volumes in the US Natural Gas Fund, an exchange-traded fund designed to track gas prices, rose by more than 30.2 million shares on Sept. 28, the largest daily volume since the record 43.1 million. shares in November 2018.

Analysts do not expect US prices to reach the high levels in Europe or Asia because the United States should have enough gas in storage for the winter heating season and because US LNG export plants were already producing all the supercooled gas they can.

The United States only has the capacity to convert about 10.5 billion cubic feet per day (bcfd) of gas into LNG, or about 13% of what the country consumes domestically.

Global markets will have to wait until later this year to get more from the United States, when the sixth liquefaction train at Cheniere Energy Inc’s (LNG.A) Sabine Pass and Venture Global LNG’s Calcasieu Pass in Louisiana is expected to produce LNG in test mode.

Reporting by Scott DiSavino; Editing by Kirsten Donovan

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