For the first time in a decade, Wall Street is shrinking their footprint in the natural-gas storage business, as booming output damps price volatility and potential profits

June 4, 2013, 6:52 p.m. ET

Wall Street Takes Foot Off the Gas


For the first time in a decade, Wall Street banks and trading firms are shrinking their footprint in the natural-gas storage business, as booming output damps price volatility and potential profits. Banks stampeded into commodities in the past two decades in search of big bets. Natural gas held a particular allure because for years the heating fuel was scarce and vulnerable to output disruptions that allowed traders to capitalize on big price swings. But that allure is fading for some. At the end of the first quarter, the amount of storage space leased by financial firms declined 0.8%, the first such drop since 2003, according to an analysis of Federal Energy Regulatory Commission data conducted by BNP Paribas BNP.FR -0.14% . “It’s really difficult for commodities traders to make the kind of money they used to make,” said Brad Hintz, an analyst who tracks investment banks for Sanford C. Bernstein. “The dynamic is changing, and it’s pretty tough for the traders to generate the profitability they’re used to.”Ironically, banks’ diminished presence could lead to an increase in volatility, as the amount of gas available to sell to consumers in the event of a big supply disruption dwindles. Utilities and gas producers also store gas but are typically less flexible when it comes to adjusting storage leases.

“We’re going to have less of a buffer,” said Teri Viswanath, the natural-gas analyst at BNP Paribas who conducted the analysis.

J.P. Morgan Chase JPM -0.83% & Co. had 17% less gas storage in the period. ForGoldman Sachs Group Inc., GS -1.15% the decline was 21%. For Bank of AmericaCorp., BAC -1.40% 13%.

J.P. Morgan didn’t respond to requests for comment. Goldman Sachs and Bank of America declined to comment.

And the trend is set to continue, according to analysts and industry observers. Leases on some 45% of storage capacity held by banks and other financial “merchants,” market parlance for companies that buy and sell physical commodities for profit as opposed to end users such as utilities, are set to expire by 2014.

Many of those leases likely won’t be renewed, as banks have curtailed their activities in commodities markets and ceded top traders to hedge funds, in part to simplify their balance sheets and appease regulators worried about capital cushions. A relatively calm natural-gas market is thwarting what little opportunity remains.

Banks and financial firms, a category that includes commodity-trading firms and energy companies’ marketing arms, still lease a large amount of gas storage that feeds into interstate pipelines. At the end of March, their leased space totaled about 514 billion cubic feet, up more than 50-fold from 1996. If filled to the brim, that is enough natural gas to heat seven million homes for a year. Financial firms’ market share of leased storage capacity rose from 9.2% in 2003 to 22% in 2013, according to BNP Paribas. Over the same time period, utilities’ market share of leased storage shrank from 72% to 61%.

The clamor for storage accompanied a pickup in U.S. natural gas use in the past decade, as more power plants were fueled by natural gas and more homes switched to gas for heat. Rising demand for natural gas meant that weather-related disruptions often had a big impact on natural-gas prices.

For example, traders could buy natural gas at about $6 per million British thermal units in early 2005. After half a dozen hurricanes, including Hurricane Katrina, swept through the Gulf of Mexico and disrupted gas output, prices had surged to $15 by December 2005. For those who were able to buy low and sell high, such a bet could reap millions of dollars in profits, depending on volumes of gas traded.

In recent years, though, natural-gas production has soared with the shale-gas boom, as new technologies have unlocked domestic supply. Most of it is produced onshore, far from hurricane-prone areas. As a result, the market is better supplied and prices don’t fluctuate as much.

“Say I’m an end user in a northern state; I can buy that gas out of my backyard now,” said Ramiro Castro, a managing director at the energy-trading arm ofMacquarie Group Ltd. MQG.AU -3.23%“I don’t need that storage anymore.”

The company is a major participant in the U.S. natural-gas market but declined to comment on its own storage leases, some of which are set to expire in 2015.

Not everyone is pulling back from gas storage. Trading firm Castleton Commodities International LLC holds leases for 23.8 billion cubic feet of gas, an increase of 19% from a year ago. A Castleton spokesman declined to comment.

Another firm, Sequent Energy Management, the merchant arm of gas distributor AGL Resources Inc., GAS -0.68% plans to renegotiate its expiring leases but at cheaper rates, said Peter Tumminello, president of Sequent.

“For those who don’t have natural gas as a core part of their business as we do, they will decide that this won’t be the right business to be in,” he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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