NatGas Traders Begged For Cash As Arctic Blast Paralyzed Texas Energy Market

Tyler Durden's Photo
by Tyler Durden
Monday, Feb 22, 2021 - 02:11 PM

Stories are emerging from veteran gas traders about the events leading up and during one of the worst energy crises in years. As the polar vortex began to dump frigid air into the central U.S. and Texas, "urgent phone calls came over the holiday weekend: traders of natural gas needed more money, and fast," said Bloomberg.

As temperatures dove earlier this month and spot prices for natgas skyrocketed 300-fold in a matter of days, traders in the physical gas market realized they had a considerable problem developing: exchanges demanded collateral due to the unprecedented volatility. 

Readers may recall, on Feb.12, natgas prices across the Great Plains erupted as supply froze in pipes due to Arctic conditions produced by the polar vortex split. By Feb. 13, traders had to come up with collateral by Tuesday (Monday was a market holiday (Presidents' Day/Washington's Birthday)), or they would be forced out of their positions for massive losses. 

Desperate for cash to meet margin requirements, some traders turned to "European parent companies that could deliver so-called margin payments on their behalf to the exchanges sooner. The cash showed up in different currencies, but it did the trick," said Bloomberg. 

"I've been through a lot: The '98 and '99 power spikes in the Midwest, the California crisis" of 2000-2001, said Cody Moore, head of gas and power trading at Mercuria Energy America.

"Nothing was as broadly shocking as this week."

Source: Bloomberg

With supply frozen in pipes and much of Texas' power generation produced by natgas, the power and gas markets hit record high spot prices last week. While natgas prices in some locations hit $1,250 per million British thermal units, wholesale power for delivery hit its $9,000-per-megawatt-hour price cap as demand exceeded supply leading to one of the worst controlled blackouts in the nation's history. 

At one point, Bloomberg calculated that up to 15 million Texans plunged into darkness during the winter blast. 

... and of course, there were winners and losers in the energy space during this entire fiasco. Jerry Jones, the billionaire owner of the Dallas Cowboys, was able to sell natgas for extraordinary high premiums. One of the losers, Atmos Energy Corp., a top supplier of gas in the U.S., is in the process of raising cash after it committed to securing $3.5 billion worth of natgas during the chaos. 

Ahead of the big freeze, natgas trader Paul Phillips of Denver-based Uplift Energy, who also advises gas producers, told clients to prepare. We wrote a very similar note titled ""Overwhelming Signal" - Major Winter Storm Threats For Million Of Americans Within Next Five Days." 

One energy trader said"we've officially hit the 'Holy Fucking Shit Levels' here..." This came as spot prices at the Oneok delivery hub in Oklahoma went from $9 on Feb. 10 to $60 on Feb. 11 to $500 on Feb. 12. 

But the spot gas price spikes now being seen were triggering truly outsized demands: According to one trader, a small market participant with a margin requirement of $100,000 saw that balloon to $1 million. Larger companies had to find tens of millions of dollars. Many spot gas trades are conducted via next-day contracts on Intercontinental Exchange Inc., which boosted its margin requirements.

After the market closed Friday, stunned traders scrambled to work out how much additional funds they would need to set aside for the following week. Some trading houses were extremely nervous. An executive at one said he was worried that some counterparties could go bust and leave his firm with positions to fill on the spot market. - Bloomberg

As natgas supply froze, it became quite clear to ERCOT, Texas' largest power company, that controlled rolling blackouts would begin. 

Some traders looking to raise more collateral urgently tapped credit lines, while lenders sprang into action. One bank was able to extend credit facilities by $500 million and have them in place when the markets reopened, according to a person working there. Other lenders also took similar action, according to other people with knowledge of the situation. "Nobody wanted to trade a liquidity event, so they stepped up," one banker said. - Bloomberg

As markets reopened on Feb. 16, natgas prices shot through the roof as weather conditions deteriorated in central U.S. and Texas. Another winter storm resulted in more weather chaos for the state. At one point, Oneok spot prices on Wednesday topped $1,250 while power prices in Texas exceeded the $9,000-per-megawatt-hour price cap. 

Phillips said natgas orders filled in the Western Rockies at prices as high as $350. "I thought maybe the highest we could get was $20 this week, to be honest," he said.

Uplift's clients were doing everything they could last week to keep natgas flowing. Some producers used portable heaters to keep pipes from freezing. "Some of our producer clients felt morally obligated that the gas was flowing," Phillips said.

Chris Bird's Oklahoma-based Exponent Energy used similar measures to keep gas wells from freezing. They used propane gas torches to keep wellheads from freezing. During the deep freeze, his company made $3 million in revenue, compared with $800k for all of last year.

John Woods, an independent trader, said while the energy crisis unfolded across the central U.S. and Texas, natgas was still flowing to gas export terminals. He said, "disgusting price-gouging that we have not seen since the California energy crisis" was observed. 

By Feb. 16, Texas Gob. Greg Abbott announced a ban on natgas shipment out of the state borders. Even then, more chaos in energy markets unfolded as one energy trader, according to Bloomberg, lost $1 million in minutes, having bet right before Abbott's ban that gas would continue to flow to the West Coast. 

The gas export ban also spilled over into Mexico, where power plants were unable to get filled. This led to widespread outages for households and factories in Northern Mexico. 

As power generation was restored later in the week and natgas prices normalized on Feb. 18, Oneok spot prices crashed 99% to 'norms' around $4 as temperatures rose. 

While many Texans got their first taste of what it was like to live in a third-world country for a week, with blackouts and lack of clean water, the energy fiasco could jeopardize the perception of how reliable natgas supplies are in the U.S. 

Serious financial difficulties may emerge from energy firms who were blindsided by soaring energy and electricity prices. 

"We'll have to see what kind of defaults come to the surface," John Kilduff, trader and founding partner at Again Capital, said. "That will dictate who can stay in.