(Bloomberg) – The urgent phone calls came over the holiday weekend: Natural gas traders needed more money, and quickly.
Temperatures in the center of the US started to drop. Heating fuel prices had skyrocketed 300 times to levels no one thought possible. This would later prove to be the harbinger of one of the worst energy crises the nation had experienced, with millions of people plunging for days in darkness amid a deadly freezer.
But on Saturday, traders in the relatively small and obscure world, namely the physical gas market, were particularly focused on one very big issue: exchanges demanded more collateral due to volatility. Traders had until Tuesday to come up with the money or they would be forced to leave their positions and, in some cases, face potentially catastrophic losses.
The dire situation caused a frenzy of 24-hour meetings. A group of traders called their first Saturday morning conference call since the Lehman Brothers collapse in 2008. The bank holiday on Monday meant that US banks were closed, so – desperate for money – some market players turned to European parent companies that could supply so-called margin payments on their behalf to the exchanges earlier. The money appeared in different currencies, but it worked.
“I’ve been through a lot: the ’98 and ’99 power surges in the Midwest, the California crisis,” said Cody Moore, Mercuria Energy America’s chief of gas and energy. “Nothing was as generally shocking as this week.” A gas trader said in a report from the weekend that his head was ‘still spinning’. Brian Lavertu, a trader in the Texas electricity market, predicted prices were about to go “wild.”
That turned out to be an understatement. In what will become one of the most remarkable weeks in electricity and gas market history, gas in some locations rose to $ 1,250 per million British thermal units, while electricity in Texas rose to its price cap of $ 9,000 per megawatt hour and The The state’s grid operator ordered the country’s largest ever forced power outage as the cold pushed the 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 at high premiums. There will no doubt 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 pledging to spend as much as $ 3.5 billion during the freeze to secure fuel. The company said it is “evaluating a number of financing alternatives, including available cash, short-term debt, long-term debt and equity.” The markets may never be the same again.
The world of physical gas is dominated by industrial buyers and sellers, trading firms, and the occasional hedge fund. The action is all about matching the demand in one corner of America’s vast energy grid with the supply in another. 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’s Electrical Grid
Gas trader Paul Phillips and his team at Uplift Energy in Denver focused the week before on the big freeze that was yet to hit Texas. Uplift advises gas producers, for a fee, on how to get the best price. It told customers to prepare.
Despite growing concerns, benchmark Nymex futures – the deepest, most liquid market for gas – were relatively stable at just under $ 3 per million BTUs.
Futures, as their name implies, reflect expectations for future supply and demand – in this particular case, through March and beyond, but not the coming weekend. Instead, it was in the spot market, where gas is bought and sold for immediate delivery, that the alarm went off.
Spot prices at the Oneok delivery hub in Oklahoma, for example, which usually traded at a small but steady discount on Nymex, rose sharply on Wednesday, February 10, reaching $ 9 on Thursday. On Friday, they briefly had more than Exceeded $ 500, a level never dreamed of before.
With physical gas sales contracts, the buyer or seller may be required to pledge collateral, such as a letter of credit, some type of insurance in case bets go wrong, or a company has a liquidity problem. Price increases usually mean that more collateral or margin is needed.
But the gas price spikes now being observed caused really outsized demands: According to one trader, a small market participant with a $ 100,000 margin requirement saw that explosion to $ 1 million. Larger companies had to find tens of millions of dollars. Much spot gas trading is conducted through next day contracts on Intercontinental Exchange Inc., driving margin requirements up.
After the market closed on Friday, the astonished traders set out to calculate how much extra money they would need to set aside for the following week. Some trading houses were extremely nervous. One executive said he was concerned that some counterparties would go out of business and leave his company with positions to fill the spot market.
There were also more practical considerations as the weather approached. Mercuria made the decision to book hotel rooms for some of its Houston employees so they could avoid driving in icy conditions. “This is an exceptional time and our first priority was to do everything we can to keep the grid moving so that the gas continues to flow properly,” said Mercuria’s Moore.
Meanwhile, important parts of Texas’s energy infrastructure were beginning to fail. Oil and gas wells ceased production because fluids in pipes were frozen. On the night of Sunday, Feb. 14, it was clear that Ercot, which oversees the Texas power grid, may need to implement rolling blackouts.
Some merchants looking to raise more collateral urgently pulled lines of credit, while lenders stepped in. One bank was able to extend the credit facilities by $ 500 million and make them work when the markets reopened, said a person who worked there. Other lenders also took similar steps, according to other people with knowledge of the situation. “Nobody wanted to trade a liquidity event, so they quit,” said one banker.
Last week on Tuesday morning, Texas was in an unprecedented energy crisis, with Ercot unable to restore most of the grid. When the markets reopened, some traders liquidated their positions as they were unable to book the extra margin.
“If you want to play, you have to pay,” said John Kilduff, trader and founder of Again Capital. “It’s a mechanism for wringing out excessive speculation.”
For those still in the game, the wild ride continued. On Wednesday, spot prices had risen sharply at Henry Hub in Louisiana, the benchmark for Nymex futures delivery, while rates at Oneok hit $ 1,250.
Click here to listen to a BloombergNEF podcast about the Texas winter storm
From home, Phillips and his colleagues worked at Uplift orders in the Western Rockies for prices up to $ 350. “I thought the most we could get this week was maybe $ 20, to be honest,” he said.
Some of Uplift’s customers went out of their way to keep the gas flowing amid the frigid temperatures at this point, using space blankets and portable heaters to keep pipes from freezing. “Some of our producer customers felt morally obligated for the gas to flow,” said Phillips.
In Oklahoma, Chris Bird’s Exponent Energy company used similar improvised measures, including a propane gas burner, to keep the 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 for the entire last year.
As awareness of the skyrocketing gas costs grew, outrage grew, even in the gas market. Some observers wondered why fuel was still flowing to the liquefied natural gas export terminals when power was still out for millions of Texans.
“What’s happening is a disgusting price hike that we haven’t seen since the California energy crisis,” said John Woods, an independent trader, referring to bargain prices. “Texas should ban fuel exports.”
Late Wednesday afternoon, Texas Governor Greg Abbott announced in a televised address that he had stopped shipping gas from the state.
That caused a new wave of panic in the market. Traders frantically sought clarification on how the warrant would be carried out. A West Coast trader working around the clock lost $ 1 million within minutes, having previously purchased a gas exchange for $ 20 – essentially betting on ongoing supply restrictions in Texas – only to see the price drop to $ 12 immediately afterwards News of Abbott’s order broke.
At the height of the power outage, nearly 4 million Texans had been cut off, but on Thursday Ercot had more success reconnecting homes and businesses, and temperatures began to recover. Gas supplies also recovered and spot prices fell. Oneok’s rates fell to reach $ 3.56 on Friday and Ercot put an end to the emergency.
While gas prices are almost back to where they started, the full ramifications of the wild ride will likely take a while to become apparent. The hasty slowdown in Texas exports could jeopardize perceptions of how reliable US LNG supplies could be in the future, said Katie Bays, general manager of FiscalNote Markets. Some financial losses in the US market may not occur until the end of March, when the billing is due for February. Severe financial damage could raise barriers to entry into the market, which in turn could reduce the amount of competition, Again Capital’s Kilduff said.
“We will have to see what kinds of defaults surface,” he said. “That will determine who can stay in.”
(Updates with details of Atmos Energy’s gas spending commitments in the seventh paragraph)
For more articles like this, visit us at bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
© 2021 Bloomberg LP