This unwinding in the natural gas market is gaining steam and getting extreme. We’ve had several down days now and something interesting happened when futures opened on Sunday. The story starts on Friday when Bloomberg published an article detailing what two of the world’s largest commodity traders were doing in the face of massive margin calls.
Major energy traders including Gunvor Group Ltd. and Mercuria Energy Group Ltd. have reduced the size of their trading positions and increased borrowing from lenders to cover large margin calls stemming from the unprecedented surge in European gas prices, according to people familiar with the matter.
Gunvor is the largest independent trader of LNG. Mercuria is no slouch either. These are big boys in big trouble. Bloomberg stated that Gunvor’s margin call is about $1B. Yes that’s a ‘B’ as in billion.
In addition, Vitrol Group, who is the biggest independent oil trader, has increased borrowing due to margin calls. They have yet to reduce their trading positions. Also, Trafigura Group is another big boy at the table. They boosted their credit lines by approximately $6B (there’s that letter again…). Trafigura has also not begun to reduce their trading positions.
Zerohedge picked up the story on Saturday and dug deeper to find some real struggles at the Gunvor Group. They were able to pick apart Gunvor’s financial position and enormous negative cash-flow from their stack hedge trade. Gunvor is looking like a ‘deer in headlights’. Their trading activity is possibly frozen and their remaining funds may be used to manage a decent into bankruptcy.
This could put further downward pressure on the US natural gas price as positions continue to unwind. Something I found very interesting on Sunday was that natural gas futures were up by over 3%. Once the US market opened, LNG got crushed. This shows me that these big boys are still trying to unwind their trades but there is demand for the price to climb once these traders either close out their trade or go bankrupt.
On the coal front, there is another story about a coal shortage. This time in India. Previously I had spotted an article about a German power plant that had run out of coal. In India, they are heavily reliant on coal for energy. Their coal-fire power plants account for roughly 70% of their electricity. India is the second largest country by population. Their coal-fire power plants are required to keep a minimum of one months’ supply on hand. Due to constraints, these power plants are running on less than 3 days’ worth of supply. This has caused alarm bells to start ringing. The Power Minister for Delhi, Satyendra Jain, has admitted that the coal crisis appears man-made. As in, the push for “green energy” has caused a deficit of coal exploration and production. I outlined how this was going to play out nearly a month ago in an article here.
Less than two weeks ago, I had written about China ordering their top energy firms to secure supplies at any cost. At the time they were experiencing rolling blackouts due to a lack of energy production. The power crunch had resulted in 20 provinces announcing some form of power cuts. Now, flooding in the top-coal producing region of China has Chinese coal futures skyrocketing. This is going to worsen the already bad energy shortfall. Flooding over the weekend has caused 60 of the 682 coal mines to close. This area of China produces roughly 30% of China’s supply. Zerohedge states:
For the fourth quarter, Citic Securities analysts told clients, China faces a gap of 30 million to 40 million tons of coal. This translates into reducing industrial power use by 10% to 15% in November and December. UBS Group AG said this would result in a 30% slowdown in activity in energy-intensive industries like steel, chemicals, and cement-making.
By shuttering these energy-intensive industries, prices for their products are going to rise if demand doesn’t wane. I’m not suggesting to go out and buy up steel and cement companies quite yet. I feel the Evergrande default is still causing a rippling effect through the Chinese real estate development industry. This could dampen demand and keep prices in balance. My primary focus continues to be coal, oil, LNG, and uranium.