How natural gas traders hit the jackpot

Whether he’s sailing his yacht in the Caribbean or playing high-stakes games of poker, Bill Perkins likes to flaunt a lifestyle that stands in stark contrast to the bleak winter facing most Britons. 

The American hedge fund boss, known as “the Last Cowboy” for his swashbuckling approach, is among investors who have made a fortune from volatile natural gas markets in recent years.

Now, as European prices hit fresh records and households struggle with soaring bills, Perkins is among those hoping to reap further riches as a global bidding war rages over shipments of liquified natural gas (LNG).

His firm, Skylar Capital, has reportedly set up a new energy-focused office in London that could benefit from the chaos, with hundreds of millions of pounds in profits potentially up for grabs.

“This is probably the best time to be a natural gas trader,” the businessman bragged to the Financial Times.

He is not wrong. With the price of gas almost five times higher than it was a year ago, LNG cargoes that were once valued at just £40m are now changing hands for £200m – the majority taken as profit.

The extraordinary rewards for delivering these shipments were on prominent display this week when the tanker Attalos docked at the National Grid’s regasification facilities in Kent.

The vessel was carrying LNG that had been transported from the northwest coast of Australia, 8,400 miles away. 

So big are the gains in the past few weeks alone that an LNG shipment that set off at the start of this month and makes port today will have seen its value double in the interim.

“It’s bonkers,” says Nathan Piper, an oil and gas analyst at Investec. “These kinds of record gas prices should not be happening in the summer.”

The LNG frenzy is being fueled by a combination of crises which have struck Europe all at once. 

As the war in Ukraine rages on, Russia has slowly reduced exports of gas to the Continent after Western sanctions were imposed.

Meanwhile, France’s fleet of nuclear reactors are laid low by technical problems and the reservoirs powering Norway’s hydroelectric plants are running low – creating even greater demand for gas to burn in power stations.

With Europe’s native gas producers going at pretty much full pelt, it means LNG from abroad is needed to fill the void. 

Alex Froley, an LNG analyst at Independent Commodity Intelligence Services, estimates that a typical tanker with capacity for 150,000 cubic metres of supercooled gas could now fetch around £190m for its cargo. 

Nearly £150m of this is likely to be profit. 

“These are all-time highs for global spot gas prices, far above anything we’ve seen in the last 20 years,” he adds.

“We’ve seen some ships waiting offshore in Europe for a few weeks before delivering, rather than going straight in. 

“They may be hoping to find slots to deliver into the highest priced markets, like the Netherlands, rather than wanting to deliver immediately into the UK or Spain, where prices are lower.”

The result of sky-high prices on European spot markets, where gas was selling for €292 per megawatt hour on Wednesday compared to just €45 a year earlier, has been a wave of frantic horse trading. 

LNG is normally traded on long-term contracts at prices that are typically much lower than the day-ahead rates, particularly in the current environment.

But the huge difference between these agreed fees and current prices has in some cases prompted traders and suppliers to simply pay the break fee so they can sell their cargoes to the highest bidder, says Investec’s Piper.

In other cases, traders have negotiated lucrative deals with the original buyer to sell gas they are owed but do not necessarily need right now and pocket the difference – with the traders also getting a slice of the action.

“Even by breaking the contract you can still make a lot of money – and that is what these traders are doing,” Piper adds.

It has put the holders of long-term contracts in a very favourable position.

“If you have bought this LNG on the cheap, you are the one now making the money,” says Laurent Segalen, an energy investment banker and host of the Redefining Energy podcast.

“And the prices being paid are beyond anyone’s understanding. It’s insane.”

Jean-Christian Heintz, a former LNG trader who now works as a consultant, says: “It’s a time when you are very happy to have long term assets.”

However, despite the machinations of Perkins and others, it is the biggest fish in the gas trading market – companies such as Glencore, Vitol, Trafigura, BP and Shell – who are likely to be making the most hay.

This is due to the huge upfront costs of securing the shipments, which now demand ever-bigger credit lines from lenders, says Heintz.

“I think it’s fair enough that companies make these profits, because it’s money that needs to be reinvested in their business in the coming years,” he adds.

He also points out that the “crazy volatility” in the markets at the moment means that businesses are by no means shooting fish in a barrel. 

“It’s an extremely risky business and it always has been. Achieving a profit always comes with a risk of equivalent loss – and now it is even more demanding.”

That sentiment was echoed by Perkins during a recent interview with CNBC, during which the fund manager appeared aboard a yacht, a tropical view bobbing up and down behind him.

He pointed to the recent fire at Freeport LNG in Houston, Texas, as an example of how sudden events can send shockwaves through markets. The site, which is the second-biggest LNG export facility in the US, is not due to come back online until November.

“Natural gas is a very dangerous game,” Perkins said. “It's not for the faint of heart but it is a wonderful product to trade.

“Things tend to go horribly wrong in natural gas. Things break, things go down, there's a lot of volatility. 

“So it’s a dangerous game – but a profitable game.”

For households and businesses across Europe, it is also likely to be a costly one.