With hedge funds including Millennium, Citadel, and Balayasny having upped their activity in Europe’s natural gas markets drawn by extreme price swings, their growing dominance now risks destabilising the market and potentially triggering a slump, according to a report by Bloomberg.
As 2024 concludes, these funds hold unprecedented volumes of long positions in European gas futures, and while such bets have benefited from volatile conditions, concerns are mounting that their concentration could exacerbate instability.
With market liquidity thinning as year-end approaches, the sheer size of hedge fund wagers looms large. Traders warn that a sudden shift — such as profit-taking or changing fundamentals — could lead to a rapid selloff, intensifying volatility in an already fragile market.
The report quotes Arne Lohmann Rasmussen, Chief Analyst at Global Risk Management, as saying that: “The heavy concentration of positions stresses the market, pushing it to a limit that will eventually break. And it becomes a real risk when everyone wants to get out at the same time.”
Unlike traditional power companies, hedge funds do not buy gas for consumers or sell production from physical assets, making their trades more speculative and less tied to operational needs, which can amplify volatility and cause abrupt price movements.
Hedge funds have reaped massive profits from Europe’s energy volatility, with Millennium earning about $600m from commodities trading in 2023, while Citadel’s commodities division brought in $4bn. Despite these gains, hedge funds’ speculative positioning could backfire if market conditions shift.
Concerns over colder winter forecasts, depleting gas inventories, and delayed liquefied natural gas (LNG) projects have fuelled a bullish outlook for gas prices, but optimism is tempered by factors such as stronger LNG flows and the potential continuation of Russian gas through Ukraine despite the expiry of a transit deal.
If geopolitical risks subside, prices could plummet as risk premiums evaporate. “For now, the market is quite bullish,” said George Cultraro, global head of commodities at Bank of America. “But the most pain is not to the upside. It’s definitely to the downside because of that same positioning, and I don’t think anybody is quite ready to give up on the bull story just yet.”
