Hedge funds adding pressure to European gas, LNG volatility

Traders have pointed to increasingly growing pressures from hedge funds trading in the gas and LNG markets, adding to the recent volatility from ongoing geopolitical and global supply-side risks.

Looking at the latest Intercontinental Exchange Index data, the number of positions for the Dutch TTF natural gas futures for the week ending May 17, 2024, totaled 2.88 billion lots for both long and short positions.

Of this total, the majority was contributed by commercial undertakings at 64.25%, which includes unregulated traders, commercial enterprises, family office and university endowment funds, according to the ICE index data.

After this, the largest proportion was contributed by investment funds at 24.05%, which comprises investment funds, unit trusts ETFs and hedge funds.

In third place was investment firms or credit institutions at around 11.68%, which account for brokers, and proprietary traders in commodity derivates.

The rest of the positions were accounted for by other financial institutions and operators with obligations under directive 2003/87/EC.

While physical players in the market hold the largest proportion of positions, traders have pointed to investment funds playing an increasing role in the last few years.

"You saw it a lot last year, where US hedge funds would look more at that [news, geopolitical, global risks] rather than supply-demand fundamentals," an LNG trader said, adding that some intraday volatility was more sentiment driven by US players rather than fundamentals.

Intraday dynamics

For most of the winter 2023-24 heating season, European gas and LNG markets remain structurally bearish, with EU gas inventories this year starting the injection season at record highs, according to Gas Infrastructure Europe (GIE) data.

However, during intraday trading sessions, European gas markets saw downwards pressure in the early morning sessions before spiking in the afternoon.

Activity has picked up this week due to growing bullish signals, however, similar intraday trends have been seen recently.

"The latest positioning data shows that investment funds reduced their net long in TTF by 11.66 million contracts over the last week to 91.55 million contracts as of 17 May, the first decline since early April," Warren Patterson, head of commodities strategy, and Ewa Manthey, commodities strategist, at ING said in a May 23 note.

Algorithm-based trading

Another LNG trader attested to period of weakness during morning sessions, noting the emergence of price spikes in the afternoon, suggesting hedge funds do not necessarily react to market fundamentals but focus more on geopolitical risks and have focus on "algorithm-based trading."

"It used to be Dated Brent that just reacted to the geopolitical risks now it's more gas [and LNG]," the second LNG trader said, adding that you now see gas, LNG markets reacting to oil-related news despite the current bearish market fundamentals.

"They do not care about fundamentals," a UK-based gas trader said, pointing to the substantial impact of institutional derivatives players.

Further to this, the source stated such players could "easily move the market" if the level of certain positions were triggered.

Likewise, a Germany-based trader observed that US-based institutional players tend to trade on news rather than European gas market fundamentals, highlighting outages at the Norwegian Continental Shelf as an example.

"I know there was excessive maintenance on Gassco side and possibility to extend and market [price] overreaction," a gas trader said. "And today it seems to back, but price reached the April 16 level, I don't think it will continue, hedge funds have already started to decrease their long positions on TTF."

Platts, part of S&P Global Commodity Insights, assessed the DES Northwest European marker for July at $10.931/MMBtu on May 22, up 18% increase on the week and 25% since the start of the month. Meanwhile, the Dutch TTF gas hub price was assessed at $11.013/MWh, up around 16.66% on the week and 23.09% since the start of the month.