European gas, LNG prices struggle to find a floor as funds shift position

The growing influence of hedge funds in the European natural gas and LNG markets has pressured market prices increasingly over the last year, with values sinking as the market now sees a shift in patterns ahead of winter.

In a recent report on European competitiveness published Sept. 9, former Italian Prime Minister Mario Draghi also highlighted the impact of speculative trading activity on volatility and prices in Europe's gas market.

Under existing regulations, financial entities can rely on exemptions around conduct and prudential rules, with the report highlighting so-called "ancillary exemptions" -- those given when an entity's primary activities are not trading.

Citing current US energy market regulations, the report called for stricter controls to be given to EU regulators to combat these risks of amplified volatility and price shocks.

"Following the US example, regulators should be able to apply financial position limits as well as dynamic caps in circumstances when EU energy spot or derivatives prices diverge markedly from global energy prices," the Draghi report said. "The EU should also put in place a common trading rulebook applying to both spot and derivatives markets and ensure integrated supervision of energy and energy derivatives markets."

Shifting funds' position

Hedge funds have been selling out of European natural gas futures, Intercontinental Exchange data showed, as they succumb to the weight of bearish pressure from weak European fundamentals.

The number of positions for Dutch TTF natural gas futures totaled 3.67 billion lots in both long and short positions for the week ended Sept. 6, according to the latest ICE data.

Of this, commercial undertakings contributed with the majority at 63%, which include unregulated traders, commercial enterprises, family offices and university endowment funds, according to the ICE index data.

After this, investment funds contributed with the largest proportion at nearly 22%, which comprises investment funds, unit trusts, exchange-traded funds and hedge funds.

Investment firms or credit institutions were in third place at 15%, accounting for brokers and proprietary traders in commodity derivatives.

The rest of the positions were made up of other financial institutions and operators with obligations under EU directive 2003/87/EC, which established the bloc's emissions trading system.

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 decreased around 9% week on week, with continued weakness since the multiyear high net-long position seen in August.

Interestingly, in the week, hedge funds continued to weaken their net-long positions at a time when the market is preparing for winter and slowly shifting to a more bullish outlook.

Commercial undertaking -- which represents physical players in the natural gas and LNG markets -- have increased their long position by around 28 million lots, while their short position has dropped around 9 million lots.

"The main driver [for the price falls] was funds closing their positions," an LNG trader said, adding that there was "ample supply and plenty of opportunities for buyers to buy LNG, but no demand right now or anyone wanting to buy till November or December."

The weakness in the fund's position has amplified the bearish weight on prices in the prompt and for next year.

Platts, part of S&P Global Commodity Insights, assessed the Dutch TTF month-ahead gas hub price at Eur35.195/MWh on Sept. 10, down around 5%.

At the same time, Platts assessed the TTF 2025 contract at Eur37.415/MWh, dropping around 4% on the day, with funds closing their positions exaggerating the bearish impact.

This also trickled down onto the European LNG markets, with the Platts DES Northwest European marker for October dropping 5% on the day to land at $11.189/MMBtu on Sept. 10.

Despite the specks of bullish signals ahead of winter surfacing, with the latest tender from Egypt being sent into the market and brewing competition in the waterborne LNG arena, prices tumbled for both European gas and LNG. Another trader added that the sharp decline in European natural gas and LNG prices was due to "hedge funds closing its positions... Hard to trade when supply is greater than demand."