Profit-hungry traders prowl local gas hubs as margins erode

By Naureen S. Malik on 9/28/2017

NEW YORK (Bloomberg) -- Profit has become so much harder to come by in the huge U.S. market for natural gas that some traders are buying and selling in lesser-known local pipeline hubs, where bigger risks offer the promise of better rewards.

Futures contracts traded in New York--a benchmark for U.S. prices--are seeing fewer of the big price swings that traders crave because of a prolonged domestic glut. But that isn’t the case in regional markets like Pennsylvania, Ohio or west Texas, where Mercuria Energy America Inc., Vitol Inc. and Trafigura Trading LLC are among those increasing bets on next-day gas deliveries, data from the Federal Energy Regulatory Commission show.

As gas production surged in remote shale formations in recent years, pipelines were built to carry those supplies to high-demand areas and boost shipments to Canada, Mexico and coastal plants that converted the gas to liquid for export overseas. While New York Mercantile Exchange futures remain the dominant vehicle for U.S. trading, gas flows have shifted, opening new markets. Volumes at more than 200 local hubs served by the Intercontinental Exchange Inc. have jumped 17% in the first half of 2017 from a year earlier.

“The shift in terms of just where the supply of gas is coming from the last five years has been dramatic,” said David Caffery, V.P. of wholesale gas supply for Newark, New Jersey-based utility owner Public Service Enterprise Group Inc., which now gets almost all its gas from nearby Marcellus and Utica shale fields in the Northeast rather than from the Gulf of Mexico like it used to. “It’s completely changed the way we buy gas.”

Disruptive influence

The move to local markets reflects the disruptive influence of new drilling techniques that unleashed prolific supplies of low-cost gas in shale basins from New York to North Dakota to Texas. Domestic output has surged almost 50% since 2006, government data show. With more new sources of supply, big utilities that use the fuel to heat homes and generate electricity have been forced to alter their trading plans and reverse pipeline flows.

“This is the largest upheaval since the market was deregulated in the 1980s,” said Stephen Schork, president of Schork Group Inc., a gas industry consultant in Villanova, Penn.

While the bulk of trading at local gas hubs still comes from utilities and others taking physical delivery of the fuel, speculators are grabbing a bigger share. Last year, 10 merchant traders represented almost 8% of the gas traded, up from 6.5% in 2015 and more than double 2012, according to Federal Energy Regulatory Commission filings.

“You can make money regionally because there are these inefficiencies that traders can capitalize on,” said Peter Henry, a New York-based managing director for H.W. Anderson Ltd., a recruiter specializing in commodity trading jobs. “The infrastructure isn’t fully built out, and you are seeing Northeast bottlenecks that can be identified and capitalized on.”

Exelon Corp., the largest U.S. competitive energy provider, expects the increased trading at local hubs will help improve market-price transparency for producers and consumers, Kelly Biemer, a Baltimore-based spokeswoman, said by email. 

Spokeswomen for Trafigura and Vitol declined to comment as did a spokesman for Geneva-based Mercuria.

One of this year’s closely-watched markets is Pennsylvania, where the startup of Energy Transfer Partner LP’s Rover pipeline had been expected to boost prices for supplies in the Marcellus shale play, the biggest U.S. gas reservoir. The gas had been selling at a discount because it couldn’t be delivered into major Midwest markets. But Rover was delayed, and Goldman Sachs Group Inc. reported losing money on its bet that prices would rise.

Another popular hub is Dominion South Point, a benchmark for Marcellus and Utica gas in Pennsylvania, Ohio and West Virginia. Dominion South Point gas started trading at deeper discounts as output in Appalachia grew faster than pipelines could be built. Prices in the region fell to a record low of 29 cents per million British thermal units in September 2016 before jumping to $3.42 within eight weeks.

The 100-day volatility for Dominion South is more than six times greater than the New York benchmark based on Louisiana’s Henry Hub, a major pipeline intersection on the Gulf Coast. The day prices fell to a record low on the local market, volume jumped to a 12-week high, data compiled by Bloomberg show. Spot-trading volume at Henry Hub, meanwhile, has been hovering at the lowest levels in data going back to 2001. Gas futures in New York were down 1.5% at $3.016/MMBtu at 2:05 p.m.

In the South, record U.S. gas flows through pipelines into Mexico are making Texas hubs more expensive relative to Henry Hub. But when a massive earthquake on Sept. 19 slashed gas demand from Mexico’s power grid, gas for next-day delivery at the Waha hub near Houston tumbled 7.3% over the following three days."

10% of trades

“There is a lot of repositioning and hedging around new infrastructure announcements or delays” as increased shipments give local hubs “their own interesting supply and demand volatility,” said J.C. Kneale, V.P. of North American power, natural gas and liquids for Intercontinental Exchange in Houston.

Regional hubs are becoming a bigger part of the U.S. gas market, based on trading on exchanges run by ICE, CME Group Inc.’s Nymex and Nasdaq Inc. They now account for about 10% of all trades, according to data compiled by ICE.

“The Henry Hub isn’t going anywhere as a benchmark, but certainly from a regional standpoint, what we have seen in the past year and what we will see in the next couple of years is growth in transportation infrastructure as these markets mature,” said Schork, the industry consultant.

With more action on local markets, utilities are turning some of their regional gas traders into specialists and hiring more people to beef up their presence at individual hubs, said Christopher Melillo, managing partner at Kaye/Bassman International Corp., which recruits energy traders. Instead of focusing on the entire Southeast or Midwest, each trader might trade just one pipeline interconnect in Alabama or a Michigan city, he said.  

“It’s granularity out of necessity,” Melillo said. “It creates a more predictable level of revenue and income.” 

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