The historic volatility witnessed in U.S.

natural gas

futures over the past week caught out some money managers who use algorithmically driven trading strategies.

Gas futures doubled in a matter of days as Arctic weather gripped much of the country and sent demand for the fuel soaring. The turmoil inflicted losses on speculators who’d been betting prices would decline, including some market players known as Commodity Trading Advisers, or CTAs, according to analytics firm Kpler Ltd.

Volatility in U.S. natural gas futures has surged to levels rarely seen in the 35-year history of the contract after the deep freeze boosted demand and strangled supplies. Although it’s too soon to assess the total dollar-value of CTA losses, it’s becoming clear the sudden rally wiped out all their gains for the year and that the scramble to close short positions as prices were skyrocketing actually accelerated the rally.

Some CTAs were holding 100 per cent short positions in gas futures at the close of business on Friday, Jan. 16, according to Kpler. During the weekend, weather forecasts shifted dramatically to warn of a brewing, expansive winter storm that would sweep much of the nation.

When trading opened on Tuesday, Jan. 20 — the previous day was a U.S. holiday — front-month futures soared as much as 29 per cent. The advance continued over subsequent days as weather models sounded alarms, culminating in a record, six-session rally.

“With a market that was leaning short and giving up on winter, it was a perfect recipe for a dramatic move higher,” said Trevor Woods, chief investment officer of Northern Trace Capital. He switched his stance from short to long in time for the price surge.

Traders remain on edge because more frigid weather is on the horizon for much of U.S. East.

One measure of gas-market volatility is at the highest since early February 2022, when winter weather lashed much of the nation, trapping some investors in a similar pincer movement of booming demand and stifled supplies. Prior to that, the futures market hadn’t endured this sort of violent fluctuation since 1996.

As demand for gas to fuel furnaces and power plants began to soar almost a week ago, frozen wells and pumping stations shut down 16 per cent of domestic supplies.

Some CTAs managed to limit losses by closing out short positions and revert to long ones as the futures pushed through key price thresholds, according to Kpler.

Still, the total profits made by CTAs in the first few weeks of January were more than wiped out during the rush to close out shorts in the first two days of the rally, the research group said.

How it unfolded

Going into the Jan. 17-19 holiday weekend, forecasts showed warmer-than-normal weather for the latter half of January. Hedge funds responded by piling into short positions, settling near the most bearish levels since 2024, according to data from the Commodity Futures Trading Commission.

Traders were shocked when they logged on after the holiday to dramatically colder forecasts that evolved to portend a sprawling, destructive storm similar to the deadly February 2021 disaster, said David Seduski, head of North American gas at Energy Aspects.

The rapidly changing sentiment caused a massive short squeeze, with speculators forced to buy back contracts at a loss, fanning the rise in the February contract.

BNEF estimated the as much as 16 per cent of U.S. gas production was knocked offline as liquids froze inside wellheads and power outages idled compressor stations crucial to making the fuel flow through pipelines, BNEF data show.

The worst of the so-called “freeze-offs” appears to be over although “significant outages” will persist for days, said Rystad Energy analyst Matthew Bernstein.

Another factor in the rise in volatility is the dearth of new gas storage, which is key to forestalling supply shortages when demand outpaces the capacity of pipelines hauling the fuel from wells to markets.

More than a decade ago, during the early days of the shale revolution, there was a boom in gas-storage construction as major oil companies and hedge funds plowed billions into carving underground salt caverns in places like West Texas. But that boom petered out around 2013, even as gas output and demand continued to expand.

“If there isn’t enough storage available, then prices need to keep going to look for the next economic level to incentivize supply creation or demand destruction,” said Eric McGuire, director of research for commodities, trading and data analytics at Wood Mackenzie Ltd.

Bloomberg.com