(Bloomberg) – The urgent calls come over the holiday weekend: natural gas traders need more money, and fast.
Temperatures began to drop in the central US. The prices for the heating fuel have skyrocketed 300 times to levels that no one possibly thought possible. It would later be the forerunner of one of the worst energy crises the country has seen and plunged into darkness for millions of days amid a deadly deep freezing point.
But on Saturday, traders in the relatively small and obscure world, which is the physical gas market, were focused on a very big problem: exchanges require more collateral due to volatility. The traders had until Tuesday to set up the cash, otherwise they would be forced to leave their positions and in some cases experience potentially catastrophic losses.
The dire situation caused a frenzy of meetings around the clock. One group of traders convened their first conference call on Saturday morning since the collapse of Lehman Brothers in 2008. The public holiday on Monday meant that US banks were closed, so – desperate for money – some market players turned to European parent companies that could deliver so-called margin payments on their behalf to the stock exchanges sooner. The cash appeared in different currencies, but it did the thing.
“I’ve been through a lot: the power surges of ’98 and ’99 in the Middle East, the California crisis of 2000-2001,” said Cody Moore, head of gas and power trading at Mercuria Energy America. “Nothing was as shocking as this week.” One gas trader said in a message over the weekend that his head was still turning. Brian Lavertu, a trader in Texas’ power market, predicted that prices were on the verge of “going wild”.
This appears to be an understatement. In one of the most remarkable weeks in the history of power and gas markets, gas rose to as high as $ 1,250 per million British thermal units in some places, electricity in Texas rose to its price cap of $ 9,000 per megawatt hour and the state’s network operator ordered the country’s largest forced eclipse ever when the cold pushed its system to the brink of total collapse.
Winners will appear – such as Jerry Jones, the billionaire owner of the Dallas Cowboys, whose gas company sold fuel for high premiums. There will undoubtedly be losers. Atmos Energy Corp., one of the largest independent gas suppliers in the US, revealed on Friday that it wants to raise money after committing to spend as much as $ 3.5 billion to secure fuel during the freezing point. The company said it is evaluating a number of financing options, including available cash, short-term debt, long-term debt and equity. ‘The markets may never be the same.
The world of physical gas is dominated by buyers and sellers of industries, trading companies and the foreign hedge fund. The action is about the corresponding demand in one corner of the large American energy network with the supply in the other. Players are obsessed with the weather that drives demand – air conditioning in the summer, heating in the winter.
Related: The two hours that nearly destroyed Texas’ electric grid
Gas dealer Paul Phillips and his Denver-based Uplift Energy team concentrated on the big freeze Texas had yet to reach the week before last. Uplift advises gas producers, for a fee, on the best price. It told customers to get ready.
Despite growing concerns, the benchmark of Nymex futures – the deepest and most liquid market for gas – was relatively stable at just under $ 3 per million BTUs.
Futures, as their name suggests, reflect expectations for future supply and demand – in this particular case until March and beyond, but not the looming weekend. Instead, the alarm was in the spot market where gas is bought and sold for immediate delivery.
Spot prices at the Oneok Delivery Center in Oklahoma, for example, which traded mostly at a small but steady discount to Nymex, moved sharply higher on Wednesday, February 10 to settle at $ 9. On Thursday, they fetched $ 60. By Friday, they had briefly exceeded $ 500, a level not previously dreamed of.
Contracts for physical gas sales may require the buyer or seller to provide security, such as a letter of credit, some form of insurance if bets go wrong or if a company has a liquidity problem. Price increases usually mean that more collateral or margin is needed.
But the increases in fuel prices now being seen have caused excessive demands: according to one trader, a small market participant with a margin requirement of $ 100,000 saw the balloon up to $ 1 million. Larger companies had to get ten million dollars. Many spot gas trades are through next day contracts on Intercontinental Exchange Inc. done, which increased the margin requirements.
After the market closed on Friday, stunned traders scrambled to find out how much additional funds they would have to set aside for next week. Some trading houses were extremely nervous. A manager of one said he was concerned that some counterparties might fill the position in the market.
There were also more practical considerations as the weather progressed. Mercuria made the decision to book hotel rooms for some of its employees in Houston so they could not drive in icy conditions. “This is an extraordinary time and our first priority was to do everything in our power to get the grid moving, and the gas to flow properly,” said Moore of Mercuria.
Meanwhile, key pieces of Texas’ energy infrastructure have begun to fail. Oil and gas wells stopped producing because liquids froze in pipes. On the night of Sunday, February 14, it was clear that Ercot, who oversees Texas’ power grid, may need to institute fatal power outages.
Some traders who want to collect more collateral urgently require credit lines while lenders arise in action. According to one person who works there, one bank was able to expand credit facilities by $ 500 million and that made money when the markets reopened. According to other people, other lenders have taken similar steps with knowledge of the situation. “Nobody wanted to trade a liquidity event, so they increased,” said one banker.
By the morning of Tuesday last week, Texas was plunged into an unprecedented energy crisis, with Ercot unable to recover most of the network. As markets reopened, some traders liquidated their positions and were unable to place the additional margin.
“If you want to play, you have to pay,” said John Kilduff, trader and founding partner of Again Capital. “It’s a mechanism to eradicate excessive speculation.”
For those still in the game, the wild ride continued. By Wednesday, spot prices had risen at Henry Hub in Louisiana, the delivery benchmark for Nymex futures, while rates at Oneok were $ 1,250.
Click here to listen to a BloombergNEF podcast about the winter storm in Texas
Phillips and his associates at Uplift worked from home and filled out orders in the Western Rockies at prices as high as $ 350. ‘I thought the highest we could get this week was $ 20, to be honest, he said.
Some of Uplift’s customers have done everything in their power to make the gas flow at this point amid the icy temperature. They used space blankets and portable heaters to prevent pipes from freezing. “Some of our producer customers were morally obligated to let the gas flow,” Phillips said.
In Oklahoma, Chris Bird’s company Exponent Energy used similar improvised measures, including a propane gas torch, to prevent gas sources from freezing. In just five days, Exponent’s wells in Osage County generated approximately $ 3 million in revenue, compared to approximately $ 800,000 for the full year last year.
As awareness of the sky-high cost of gas increased, indignation increased, even within the gas market. Some observers have questioned why fuel was still flowing to liquefied natural gas export terminals when millions of Texans’ power was still down.
“What’s going on is a disgusting prize money that we have not seen since the energy crisis in California,” said John Woods, an independent trader, referring to the spot prices. “Texas must ban fuel exports.”
By late afternoon, Texas Gov. Greg Abbott announced during a televised speech that he had stopped sending gas from the state.
This has created a fresh wave of panic in the market. Traders frantically demanded explanation as to how the order would be enforced. One West Coast trader who worked 24 hours a day lost $ 1 million in minutes after buying a $ 20 gas bill earlier – which essentially put on continued supply constraints in Texas – only to see that the price would drop immediately to $ 12. news of Abbott’s order broke.
At the height of the power outages, nearly 4 million Texans were cut off, but by Thursday, Ercot had more success reconnecting homes and businesses, and temperatures began to recover. Gas supplies also recovered, and spot prices fell. Oneok rates fell to $ 3.56 on Friday and Ercot ended the state of emergency.
While gas prices are almost back to where they started, the full effects of the wild ride are likely to take a while to emerge. The hasty curb on Texan exports could jeopardize the perception of how reliable U.S. LNG supplies could be in the future, said Katie Bays, managing director of FiscalNote Markets. Some financial losses in the US market can only emerge by the end of March when the invoice is payable for February. Serious financial damage could eventually increase barriers to market entry, which in turn could reduce competition, Kilduff told Again Capital.
“We’ll have to see what kind of standards come up,” he said. “It will determine who stays in power.”
(Updates detailing Atmos Energy’s commitments to gas spending in the seventh paragraph)
For more articles like this, please visit us at bloomberg.com
Sign up now to stay ahead of the most trusted business news source.
© 2021 Bloomberg LP