(Bloomberg) – Urgent calls came over the holiday weekend: natural gas traders needed more money, and fast.
Temperatures were starting to plummet in the central United States. Heating fuel prices have soared 300 times, to levels that no one could have imagined. It would later prove to be the precursor to one of the worst energy crises the country has ever seen, plunging millions into darkness for days amid a deadly and deep freeze.
But on Saturday, traders in the relatively small, obscure world that is the physical gas market were focused on a very big problem: exchanges demanded more guarantees because of volatility. Traders had until Tuesday to withdraw the money, or else they would be forced out of their positions and, in some cases, would face potentially catastrophic losses.
The dire situation triggered a frenzy of uninterrupted meetings. A group of traders called their first teleconference on Saturday morning since the collapse of Lehman Brothers in 2008. The holiday on Monday meant the closure of US banks, so – desperate for money – some market participants turned to the headquarters companies that could deliver so-called margin payments on their behalf to exchanges earlier. The money appeared in different currencies, but it worked.
“I’ve been through a lot: the energy peaks of 98 and 99 in the Midwest, the California crisis” of 2000-2001, said Cody Moore, head of gas and energy trade at Mercuria Energy America. “Nothing was as shocking as this week.” A gas trader said in a message over the weekend that his head “was still spinning”. Brian Lavertu, a Texas energy market trader, predicted that prices were about to go crazy.
This turned out to be an understatement. In what will be one of the most memorable weeks in the history of the energy and gas market, gas has risen to $ 1,250 per million British thermal units in some locations, electricity in Texas has reached its price limit of $ 9,000 per megawatt- hour and the state’s network operator ordered the country’s largest forced blackout, while the cold brought its system to the brink of total collapse.
Winners will emerge – like Jerry Jones, the billionaire owner of the Dallas Cowboys, whose gas company sold some fuel for high prizes. Without a doubt, there will be losers. Atmos Energy Corp., one of the largest independent gas suppliers in the United States, revealed on Friday that it is trying to raise money after pledging to spend up to $ 3.5 billion to secure fuel during the freeze. The company said it is “evaluating a number of financing alternatives, including available cash, short-term debt, long-term debt and equity”. Markets can never be the same again.
The physical gas world is dominated by industrial buyers and sellers, commercial firms and some hedge funds. The move revolves around matching demand in one corner of the vast US power grid with supply in another. Players are obsessed with the climate that drives demand – air conditioning in summer, heating in winter.
Related: The two hours that almost destroyed the Texas power grid
Gas trader Paul Phillips and his team at Denver’s Uplift Energy spent the week before last focused on the big freeze that had not yet reached Texas. Uplift advises gas producers, for a fee, on how to get the best price. He told customers to get ready.
Despite growing concern, Nymex’s benchmark futures – the deepest, most liquid market for gas – have remained relatively stable at just under $ 3 per million BTUs.
Futures, as the name implies, reflect expectations of future supply and demand – in this specific case, until March and beyond, but not the coming weekend. Instead, it was on the spot market, where gas is bought and sold for immediate delivery, that the alarm started to ring.
Spot prices at the Oneok delivery center in Oklahoma, for example, which had been negotiating mainly with a small but constant discount for Nymex, rose sharply on Wednesday, February 10, to close at $ 9. on Thursday, they reached $ 60. On Friday, they briefly surpassed $ 500, a level never before imagined.
Physical gas sales contracts may require the buyer or seller to give guarantees, such as a letter of credit, a kind of insurance in case the bets go wrong or if a company has a liquidity problem. Price gains usually mean that more guarantees, or margin, are needed.
But spikes in spot gas prices were now triggering truly exaggerated demands: according to one trader, a small market participant with a margin requirement of $ 100,000 saw that balloon for $ 1 million. Larger companies had to find tens of millions of dollars. Many spot gas deals are conducted through next-day contracts at Intercontinental Exchange Inc., which has increased its margin requirements.
After the market closed on Friday, stunned traders struggled to find out how much additional money they would need to set aside for the following week. Some business houses were extremely nervous. One executive at one said he feared that some counterparties would break down and leave his company with positions to fill in the spot market.
There were also more practical considerations as the weather got worse. Mercuria decided to book hotel rooms for some of its employees in Houston, so that they could avoid driving in icy conditions. “This is an exceptional time and our first priority was to do what we could to keep the network moving, the gas flowing properly,” said Moore of Mercuria.
Meanwhile, key parts of Texas’ energy infrastructure have begun to fail. The oil and gas wells stopped producing when liquids froze in the pipes. On Sunday night, February 14, it was clear that Ercot, who oversees the Texas power grid, might have to implement continuous blackouts.
Some traders looking to raise more guarantees have turned to credit lines urgently, while creditors have taken action. One bank was able to extend the credit lines by $ 500 million and have them in place when markets reopened, according to a person who worked there. Other creditors have also taken similar measures, according to others who are aware of the situation. “Nobody wanted to trade a liquidity event, so they went up,” said a banker.
As of Tuesday morning last week, Texas was plunged into an unprecedented energy crisis, with Ercot unable to restore most of the grid. With the reopening of the markets, some traders liquidated their positions, unable to post the additional margin.
“If you want to play, you have to pay,” said John Kilduff, broker and founding partner at Again Capital. “It is a mechanism for sparking excessive speculation.”
For those still in the game, the wild ride continued. On Wednesday, spot prices rose at Henry Hub in Louisiana, the delivery benchmark for Nymex futures, while Oneok’s rates reached $ 1,250.
Click here to listen to a BloombergNEF podcast about the Texas winter storm
Working from home, Phillips and his co-workers at Uplift saw orders filled in the Western Rockies at prices up to $ 350. “To be honest, I thought maybe the most we could get was $ 20 this week,” he said. .
Some of Uplift’s customers were doing everything they could to keep the gas flowing at this point amid cold temperatures, using space blankets and portable heaters to keep the pipes from freezing. “Some of our producing customers felt morally obligated that the gas was flowing,” said Phillips.
In Oklahoma, Chris Bird’s company, Exponent Energy, was using similar improvised measures, including a propane torch, to prevent its gas wells from freezing. In just five days, Exponent’s wells in Osage County raised about $ 3 million in revenue, compared to about $ 800,000 over the past year.
As awareness of the high cost of gas grew, indignation grew, even within the gas market. Some observers questioned why fuel was still flowing to liquefied natural gas export terminals when power was still off for millions of Texans.
“What is happening is a revulsion in prices that we have not seen since the California energy crisis,” said John Woods, an independent trader, referring to spot prices. “Texas should ban fuel exports.”
Late Wednesday afternoon, Texas Governor Greg Abbott announced during a televised speech that he had stopped sending gas from the state.
This created a new wave of panic in the market. Traders frantically sought clarification on how the order would be executed. A West Coast trader who worked 24 hours a day lost $ 1 million in minutes, having previously purchased a $ 20 gas exchange – essentially betting on continued supply restrictions in Texas – only to see the price drop to $ 12 immediately after news of Abbott’s order was released.
At the peak of power failures, nearly 4 million Texans were cut, but by Thursday Ercot was having more success in reconnecting homes and businesses, and temperatures were starting to recover. Gas supplies also recovered and spot prices plummeted. Oneok rates fell to close on Friday at $ 3.56 and Ercot ended emergency conditions.
Although gasoline prices are almost back to their starting point, all the repercussions of the wild ride are likely to take time to appear. Harsh restrictions on Texan exports could undermine the perception of how reliable the US LNG supply could be in the future, said Katie Bays, managing director of FiscalNote Markets. Some financial losses in the American market may appear only at the end of March, when the February billing expires. Serious financial damage could end up raising barriers to entry, which in turn can reduce the amount of competition, said Kilduff of Again Capital.
“We will have to see what kind of default will come up,” he said. “It will dictate who can stay.”
(Updates with details of Atmos Energy’s gas spending commitments in the seventh paragraph)
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