(Bloomberg) -- As winter temperatures dip, the days get shorter and energy prices rise. But this year, higher than usual European gas prices in the summer mean contracts could drop sharply.
With the prospects of supply shortages starting to evaporate weeks away from the heating season, demand for the fuel is expected stay muted in the short term. That risks leaving the market with too much gas to sell just when the stockpiling season ends and with the region’s gas storage facilities near full levels.
The risks are playing out in both the futures and options markets. A rush during summer to buy protection against surging prices for contracts expiring at the start of winter has left traders holding a chunk of options expiring in October.
At the same time, the number of net-long positions held by speculators, a wager that prices would keep rising, are still near the highest since 2021, when Russian gas flows started falling short of forecasts, triggering price spikes that later transformed into a region-wide energy crisis.
“This huge net-long position together with almost full EU inventories is a ticking bomb,” said Arne Lohmann Rasmussen, chief analyst at Global Risk Management in Copenhagen. “We are now hopefully past the demand from the global heat waves and while hurricane Francine might still give some short-term support to the market, the price risk is now to the downside.”
Recent supply threats centered around hurricane Francine, which has weakened after slamming into the coast of southern Louisiana late Wednesday with 100-mile-per-hour winds. The storm will not directly hit the region’s major gas export plants. Gas transit worries via Ukraine also contributed to the concerns.
While recent experience has shown that daily prices can still be volatile, a selloff earlier this week sent them down to a six-week low, adding to evidence of a nearing price drop.
The growing presence of algorithm-focused funds — that have played a significant role during previous selloffs — also tends to amplify price moves. They could also make it harder for traders with physical exposure to navigate the market.
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