* Prop-traders took big short positions early in winter
* Mild winter created oversupply and pulled down prices
* Threat of Russia gas cut caused many short trades to shut
By Henning Gloystein
LONDON, March 5 The crisis in Ukraine has ended
one of the biggest short positions in recent European natural
gas trading as the threat of a Russian supply cut forced
speculative dealers to close positions they had profitably held
In gas markets, the natural sellers ahead of the winter,
when demand reaches a peak, are gas producers like Russia's
Gazprom and Norway's Statoil.
They typically sell to utilities that have to restock their
inventories in order to be prepared for shortages in case of
extreme cold or unforeseen supply disruptions.
The difference between the outgoing winter season and
previous years was that utilities bought unusually large amounts
of gas in order to refill inventories after the long winter of
2012/2013, fearing a repeat of last year's squeeze when storage
sites across Europe were almost depleted.
This situation created an opportunity for speculative
traders, also known as prop-traders, who looked at seasonal
weather forecasts and saw a strong likelihood that there would
not be a repeat of last year's long winter, creating a gas
overhang and a short-trading opportunity.
"Inventories were full and it was one of the warmest winters
on record across Europe, so it was clear that prices had to
correct downward," said a gas trader with a major financial
player in London.
Benchmark British gas futures for delivery next summer
dropped 15 percent in value between December 2013 and late
February of this year, and other energy products also registered
"It is logical that it wasn't the suppliers who shorted the
market," he added.
An investor who borrows a product from a broker and then
sells it is said to have a short position. The investor must
eventually return the borrowed product by buying it back from
the market. If the product has fallen in price, the investor
buys it for less than it was sold, creating a profit.
"Being short throughout the first quarter (of 2014) worked
great. Storages weren't being depleted like last year and there
was a decent gas surplus," said one prop-trader.
Reuters data shows that German gas inventories, Europe's
largest, are currently higher than at any point for this time of
year in half a decade, and overall European storage levels are
also healthy, creating a large gas surplus.
UKRAINE FORCES OUT SHORTS
Conditions changed last Monday when the market began
anticipating a Russian gas cut to Ukraine, through which pass
about a third of Russia's supplies to western Europe, sending
benchmark European gas prices up 10 percent.
"There was a bump in the road with Ukraine and Russia's
sabre rattling. There were a lot of big short positions out
there. Some of those shorts got closed, but there wasn't enough
liquidity to close all those positions, so there was a lot of
pain on Monday," the prop-trader said.
Market participants said the situation began to ease by
Tuesday when it became clear that Europe's high gas storage
levels would be able to deal with a short-term Russian supply
cut, which itself has since been deemed unlikely.
"We believe disruption concerns and recent gas price action
are overdone," Goldman Sachs said in a research note this
"Those that are still short because they couldn't close
their positions due to low liquidity will sigh with relief,
because if Russia doesn't cut supplies there is still downward
space in gas prices and opportunity for short players," a
utility trader said.
Market sources said this winter's downward price trend was
reinforced by aggressive prop-traders who moved into the market
and replaced big banks, many of which have scaled back or shut
their European energy trading desks.
"Where the banks left, small but aggressive London
hedge-funds and big Swiss merchant houses have moved into the
market, increasing price volatility by taking aggressive,
lightly hedged positions," a trader with a major supplier said.
Many of these funds and merchants took short positions last
winter, industry sources said.