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* 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 (Reuters) - 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 throughout winter.
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 multi-year lows.
"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.
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 week.
"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.