Hedge funds' long positions one of key drivers for bullish European gas, LNG

Hedge funds have continued to increase their net-long positions in the European natural gas and LNG markets week on week to reach multiyear highs, according to Intercontinental Exchange data, with traders seeing funds' positions as of the main drivers for the bullishness as well as uncertainty.

The number of positions for Dutch TTF natural gas futures totaled 2.99 billion lots in both long and short positions for the week ended Aug. 16, according to the latest ICE data.

Of this, the majority was contributed by commercial undertakings at 64%, which include unregulated traders, commercial enterprises, family offices 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 14%, which account for brokers and proprietary traders in commodity derivatives.

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

While physical participants 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 14% week on week to reach the strongest net-long position funds have taken since July 2, 2021, according to the data.

"Saw recently that a significant adjustment in spec positions on the gas market, with short covering trend the week before was the largest single week of spec buying pressure - the most important net long since 2021," a gas trader said. "In particular, the absence of shorts more than aggressive longs."

An LNG trader added that there were no real bullish factors in the European gas and LNG markets besides the likely expiry of the Russia-Ukraine transit and hedge funds' current positions in the futures markets.

A second LNG trader added that: "Don't know if people think prices will go up but it's more than the potential loss if you're short is bigger than the loss if you are long; if you are long, you know how much you can lose but if you're short you do not know how much gas you need."

A Czech gas trader observed "big spec" on the European gas market recently, attributing it to funds' stress levels, as he said the underlying fundamentals were "still bearish," however "the prices were going up."

Funds' influence for 2025

Funds were going long on the TTF summer 2025 contract, a Germany-based trader said.

"Most of them betting that just a normal winter would deplete the reserves and that we got lucky two years in a row with a mild winter," the trader said.

"No one I talk to has a strong conviction, but you've got to put all that fund money somewhere," the trader said, "given that most fund traders were lifted at the peak of the market, now they have to justify their seats and in a la Nina year you can have a cooler winter."

"I agree with them on the fact that most of the move happens over the summer for the refill period, not during winter where risk premiums just get discounted as time goes by," the trader added.

Given the delays of new LNG supply for 2025, as well as the likely expiry of the Russia-Ukraine transit agreement, traders have seen funds take an increasingly net-long position despite the structurally bearish gas and LNG markets in Europe in the near term ahead of this winter.

"The second week that we see huge volumes, around 30 TWh, but honestly, I'm not that surprised after this spike – you would expect some stop losses ... the move is more on the less short than more longs," a Switzerland-based gas trader said. "I think everyone is quite convinced that this length is on summer 2025."

Platts, part of S&P Global Commodity Insights, assessed the Dutch TTF Winter 2024 contract at a premium of Eur1.255/MWh to its Summer 2025 counterpart Aug. 21, at its narrowest level since the month began. This spread was assessed at an average premium of around Eur1.365/MWh over July.

"In Q1 there is still some risk, of course, but just by how inflated summer has been and the buying interest we have seen there. Q1 there is still some geopolitical risk, but how do you know how much has already been priced in ... I think Q1 is still manageable but come the summer when nobody is able to refill storages, this is why the summer is so strong given this huge risk that it will be very difficult," the Switzerland-based traded added.

The uncertainty for next year was also keeping the Summer-25 and Winter-25 Northwest European LNG differentials narrow.

Platts assessed the NWE LNG Summer-25 contract at a 45 cents/MMBtu discount versus Winter-25 on Aug. 21, this compared to the $1.15/MMBtu discount on Aug. 21, 2023, Commodity Insights data showed.