Investment fund's net-long position recedes after record highs on uncertain winter outlook

As the latter part of winter approaches and uncertainty grows in the European gas and LNG markets, funds have begun to close some of their net-long positions. This shift follows recent record highs driven by warmer weather forecasts and subdued Asian demand for the super-chilled fuel.

Combined long and short positions held for Dutch TTF natural gas futures rose to total around 3.67 billion lots as of the week ended on Dec. 6, this basis the latest Commitment of Trader data from Intercontinental Exchange showed.

Commercial undertakings remained the group of market participants with the largest share of held positions, constituting some 65% of these, and saw their net short position in the TTF fall from around 102 million lots to around 78 million lots week on week.

In comparison, investment funds again weakened their net-long position for TTF futures for the first time since the beginning of November, with this falling from last week's record high of 293.62 million lots to 267.98 million lots by the week ended on Dec. 6.

Meanwhile, natural gas prices at the influential Dutch TTF hub have eased over recent sessions, with the month-ahead contract last assessed by Platts, part of S&P Global Commodity Insights, at Eur44.725/MWh Dec. 11, down sharply from the year-to-date high of Eur48.575/MWh assessed Nov. 21.

The investment fund's net-long position rose nearly 3% from the week ended on Nov. 15 to Nov. 22, before rising nearly 5% on the week ended on Nov. 29 to hit a record high. From Nov. 29 to the week ended on Dec. 6, fund's net-long position fell by around 8%.

In comparison, Platts assessed the TTF 2025 contract at Eur43.985/MWh on Nov. 15, this rose around 2% on the week to reach Eur44.94/MWh on Nov. 22. From Nov. 22 to Nov. 29, the TTF 2025 contract rose just over 1% before falling around 3% to land at Eur44.295 on Dec. 6.

Curve prices experienced a sharp fall during the Dec. 12 trading session, with the front-month contract of the Dutch TTF lastly seen trading at 42.605/MWh as of 1521 GMT of that day, according to data from ICE. Most players attributed this fall to more CTAs closing their positions ahead of the holidays as the weather is announced to be warmer for the rest of the winter and demand in Asia remains muted.

"The market was too low in volatility. And theta is expensive, so it's better to partially or totally reduce the Gamma/Vega exposure, which will help reduce Theta," a France-based portfolio manager said. "It's quite strategic in this low volatility environment. The fact that funds are closing their long positions on gas is not surprising."

Theta measures how much an option's value decreases as it approaches its expiration date. Gamma measures the sensitivity of delta (the rate of change of an option's price relative to the price of the underlying asset) to movements in the price of the underlying asset, while Vega measures the sensitivity of the option's price to changes in volatility.

"I am surprised of the drop, I am convincing myself this low is purely on CTAs [closing their positions] so a good entry point if you are fundamentally bullish..." a UK-based gas analyst said.

A Germany-based gas trader said that the recent downward trend in TTF derivatives prices was directly related to the shift in the financial players' long positions.

"As we see so [sizeable] financial positions, I think fundamentals [are] just playing a minor role," the trader said.

"There is little else that is driving the market," a UK-based trading analyst said, referring to funds' moves.

"To be honest, this wasn't a surprise. If prices go down, there is a good chance that funds are clearing their length," one Netherlands-based trader said. "I'm [confident] prices are going to be the same as last year, a continuous drop from now on... everybody is hedged storage-wise so no need to buy extra; funds are going to bring it down with few people to buy on the other side."

Uncertainty still surrounds the injection season for Summer 2025, with LNG and natural gas contracts for Summer still standing at a steep backwardation to the winter equivalent.

A trading analyst added that: "Investment funds are still long; there are warmer forecasts this week and it will be probably cold by the end of the year [but they were] probably cleaning up some of their long position... It's interesting given the uncertainties [for 2025] are still there in the market."

Platts last assessed the TTF Summer 2025 contract at a premium of Eur2.67/MWh versus the Winter 2025 contract on Dec. 11.

Although this summer-winter spread has narrowed significantly from the Eur4.22/MWh premium seen Nov. 21, it remains well above the Eur4.55/MWh discount between Summer 2024-Winter 2024 assessed on Dec. 11, 2023.

At the same time, Platts assessed the Northwest European LNG Summer-2025 contract at $13.115/MMBtu, while the NWE LNG Winter-2025 contract was assessed at $12.361/MMBtu.

The 75.4 cents/MMBtu Summer-Winter backwardation compared to the $1.956/MMBtu contango seen from this time last year.

"There is a fair amount of US LNG export capacity ramping up at the moment, and further capacity is expected to start up over the course of 2025," Warren Patterson, head of commodities strategy at ING, said. "In addition to the US, there is also a capacity set to start up in Canada and Mexico. With the capacity added this year and next, we are looking at around 50 bcm of additional LNG supply in 2025."

Patterson added that there are, however, clear risks with ramp-ups -- and there is certainly the risk of unplanned outages at already-producing plants, which could see the net addition of LNG supply coming in lower.