Hedge funds increase their net-long position in European natural gas and LNG markets

Hedge funds have continued to increase their net-long position despite the looming bearish pressures in the European natural gas and LNG markets, with some traders still awaiting for the bullish threats to take hold in the market.

According to the latest Intercontinental Exchange Index data, the number of positions for the Dutch TTF natural gas futures for the week ending July 19 totaled 2.91 billion lots for both long and short positions.

Of this total, the majority was contributed by commercial undertakings at around 65%, 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 nearly 22%, which comprises investment funds, unit trusts ETFs and hedge funds.

Investment firms or credit institutions were in the third place at around 13%, 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.

Notably, the net-long position of investment funds increased nearly 4% week on week, while commercial undertakings saw a nearly 7% increase in their net-long positions.

Despite the European gas and LNG markets remaining structurally bearish, cushioned by high gas inventories and strong renewables supply, the markets remain susceptible to any supply-side shocks and tightness in the global LNG markets.

This comes at a time where competition between Asia and Europe for the waterborne liquefied natural gas fuel could keep prices elevated.

"European natural gas prices saw renewed strength yesterday. TTF settled almost 3.2% higher on the day despite European storage continuing to edge higher," Warren Patterson, head of commodities strategy, and Ewa Manthey, commodities strategist at ING, said in a July 25 note.

Patterson and Manthey added that a burst of spot LNG buying in Asia supported prices in the European market.

Platts, part of S&P Global Commodity Insights, assessed the DES Northwest European marker for September at $10.568/MMBtu on July24, up 37.9 cents/MMBtu on the day.

Meanwhile, the Dutch TTF gas hub price was assessed at Eur32.705/MWh, up Eur1.345/MWh on the day.

"Meanwhile, investment funds increased their net long in TTF by 5TWh over the last reporting week to a little over 131TWh," Patterson and Manthey said. "The move higher is being pinned on some Asian buying in the spot LNG market. Speculators continue to hold a sizeable position in TTF, despite the comfortable storage situation in Europe."

Positions down the curve

Some European traders attributed the increasingly net-long position to uncertainty down the LNG and gas forward curves across Europe.

"I think there is significant length along the curve, everyone seems long and there are just more buyers than sellers right now," a Switzerland-based gas analyst said. "This is why prices haven't move that much. And looking at each quarter... you can see a big amount of volume moving right before delivery. I think this indicates spec traders, otherwise you would just take delivery... of course it is impossible to know where the length is exactly, but the volume traded has multiplied this year, and this tells you there are a lot more players."

According to the latest July 18 ACER Market Monitoring Report exchange and brokered trading volumes at EU Virtual Trading Points rose to 249.07 TWh/d in 1H 2024, compared with 178.24 across 1H 2023 and 158.8 in 1H 2022.

"I think funds are holding long winter, and as long as the summer-winter spreads don't collapse, then I don't think they have a reason to exit," a Dutch trader said. "This does lead to some erratic behavior in the market: they aren't here to take delivery but just to make money. If they do start selling then we could see prices drop, but where are they long? You can't see this in the data."