Short-seller massacre! Natural gas short positions are wiped out by the cold wave

Due to the Arctic cold wave sweeping most of the United States, natural gas demand has surged, causing natural gas futures prices to double in just a few days. Analysis company Kpler Ltd. stated that this market turmoil has resulted in losses for speculators betting on falling prices, including some market participants such as commodity trading advisors (CTAs).

The volatility of U.S. natural gas futures has soared to a rare level in the 35-year history of the contract, as the extreme cold weather has increased natural gas demand while supply has stagnated. Although it is currently impossible to assess the total losses for CTAs, it is evident that this sudden surge has wiped out all their gains for the year, and the behavior of investors rushing to close short positions during the price spike has further fueled the upward trend.

Data from Kpler shows that on January 16 (Friday), some CTAs held 100% short positions in natural gas futures. Over the weekend, the weather forecast underwent a significant change, warning that a widespread winter storm was about to form and sweep across most of the United States.

When U.S. stock trading resumed on January 20 (Tuesday) — the previous day was a federal holiday — the near-month natural gas contract opened up 29%. In the following days, as meteorological models continued to issue warnings, the upward trend persisted, ultimately setting a record for six consecutive increases.

Trevor Woods, Chief Investment Officer of Northern Trace Capital, stated, "The market was generally short and had low expectations for winter demand, which created perfect conditions for a significant price surge." He timely shifted his trading position from short to long, riding the wave of this price spike.

Traders remain vigilant as a new round of cold wave is about to hit most of the eastern United States.

A volatility indicator for the natural gas market has risen to its highest level since early February 2022, when a cold wave similarly swept across most of the United States, leaving some investors in a similar predicament of surging demand and constrained supply. Prior to this, the natural gas futures market had not experienced such extreme volatility since 1996.
The volatility indicator for U.S. natural gas futures has risen to its highest level since early February 2022.

About a week ago, as demand for natural gas for heating and power generation began to surge, frozen oil wells and pump stations led to a 16% reduction in domestic natural gas supply.

Kpler stated that as natural gas futures prices broke through key levels, some CTAs managed to control their losses by closing short positions and reverting to long positions.

However, the research institution noted that in the first two trading days of this surge, CTAs acted hastily to close short positions, erasing all profits they had earned in the weeks leading up to January.

Event Timeline

Before the holiday weekend from January 17 to 19, weather forecasts indicated that temperatures in the U.S. would be above the historical average in late January. Data from the Commodity Futures Trading Commission showed that hedge funds subsequently built up significant short positions, nearing the most pessimistic levels since 2024.

David Seduski, head of North American natural gas at Energy Aspects, stated that traders were shocked by the drastically lowered temperature forecasts when they logged into trading systems after the holiday, as this cold wave ultimately evolved into a widespread and destructive storm, comparable to the deadly cold wave disaster in February 2021.

The sharp shift in market sentiment triggered massive short squeezes, forcing speculators to buy back contracts at a loss, further driving up February contract prices.

Data from Bloomberg New Energy Finance (BNEF) shows that frozen liquids inside wells and power outages led to the shutdown of key compression stations for natural gas pipeline transport, resulting in a maximum reduction of 16% in U.S. natural gas production.

Matthew Bernstein, an analyst at Rystad Energy, stated that the worst phase of this severe "frozen blockage shutdown" seems to have passed, but a "significant disruption" in natural gas supply will continue for several days.

Another major reason for the rise in natural gas market volatility is the shortage of new storage facilities, which are crucial for alleviating supply shortages when natural gas demand exceeds pipeline transport capacity.
Stagnation in storage capacity has led to increased volatility in the natural gas market.

More than a decade ago, during the early days of the shale revolution, the U.S. experienced a boom in the construction of natural gas storage facilities, with large oil companies and hedge funds investing billions of dollars to excavate underground salt cavern storage in areas like West Texas. However, this construction boom came to a halt around 2013, while natural gas production and demand continued to grow.

Eric McGuire, head of commodities, trading, and data analysis at Wood Mackenzie, stated, "If available storage facilities are insufficient, natural gas prices must continue to rise until they reach a new economic equilibrium, stimulating supply increases or suppressing demand."
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