Manufacturers’ group asks CFTC to probe Jan. 27 Henry Hub futures price spike

An industrial trade group has urged the US Commodity Futures Trading Commission to investigate the expiring natural gas futures contracts for Jan. 27, pointing to a 46% one-day price increase and warning of costs to consumers and manufacturers.

At issue is the NYMEX Henry Hub prompt-month contract, which jumped $1.988, or 46%, to settle at $6.265/MMBtu on Jan. 27.

Percentagewise, the Jan. 27 price surge was the largest day-on-day price movement in NYMEX Henry Hub history, according to records dating back to Aug. 26, 1998. However, the NYMEX Henry Hub prompt-month saw a larger day-on-day movement on Feb. 24, 2003, when the contract jumped $2.53, or 38%, to $9.137/MMBtu.

The Industrial Energy Consumers of America wrote CFTC Chairman Rostin Behnam Feb. 2, asking the regulator to look into the role of derivatives, who benefited, and how the CFTC could prevent such a spike in the future. He also urged the commission to look into whether its expanded speculative position limits were a factor in the spike, and what role passive funds may have played. He also asked the regular to examine who was on either side of the closing price.

"The 46% price spike was an enormous cost increase to consumers and inflation," wrote Paul Cicio, president and CEO of the trade organization. "Using the US Energy Information Administration data for the previous year (February 2021), US natural gas volume was 3.0 Tcf. The February monthly volume times the difference of $4.28/MM/Btu and $6.26 per MM/Btu amounts to a $6.2 billion cost/price increase to consumers for their February 2022 natural gas."

Cicio noted that the February futures at one point jumped to nearly $7.35/MMBtu, and that trading was "so sharp" that it was paused dozens of times by circuit breakers aimed at maintaining orderly trading.

Market watchers' view

Market watchers have largely diagnosed the expiry-day price spike as a physical short squeeze, unrelated to market fundamentals, in which traders holding short positions needed to close out or deliver physical gas and had limited options. The price run-up accelerated in the final 30 minutes of trading, which some analysts presented as further evidence of a squeeze.

"God has not invented a fundamental that would drive natural gas prices up $31,000 [per 10,000 MMBtu contract] in one day," Stephen Schork, principal at The Schork Report, said in a phone interview with S&P Global Platts on Jan. 27. The highest price of the session on Jan. 27 reached $7.35/MMBtu, nearly $3.10 higher than the contract's prior-day settlement.

Some analysts compared the Jan. 27 price movement to when WTI crude oil went negative in April 2020. Traders with long positions struggled to close out on the prompt-month's last day prior to expiry, which triggered a sell-off frenzy.

"It's a feature of financial futures," Daniel Myers, senior analyst at Gelber & Associates, told Platts in a Jan. 27 phone interview.