Views From the Floor - Can Gas Defy Geopolitical Gravity Again?

Several factors may lead gas prices higher in 2023; the message from crypto futures; and a closer look at volatility before CPI prints.

Looking only at the start and end points of a journey rarely tells the full story of the route taken. European natural gas prices, for example, began and closed 2022 in roughly the same place. Yet that dramatically understates their extreme volatility last year, primarily driven by the market disruptions following Russia’s invasion of Ukraine (Figure 1).

Figure 2 illustrates why gas prices have fallen so precipitously from their summer peak: European inventories are fuller than they have been in recent years, due to a combination of demand destruction from high prices and mild weather, as evident in the flattening of the orange line at the end of the period in Figure 2.

Attention must now turn to next winter, and unfortunately we would not expect these favourable conditions to endure given two sets of significant challenges. First, Russia could still further reduce its supply to Europe, albeit at some economic cost to itself.

Second, Europe’s greater reliance on imported liquefied natural gas (LNG) has several potential drawbacks, in our view: LNG has a higher base cost than traditionally piped gas because of the processing and transportation involved; Europe is competing with Asia for LNG supplies, so would be affected not only by a cold local winter but a cold Asian winter; a reopening China is likely to add to demand; and Europe paid for Russian gas in euros but now buys LNG in US dollars, adding pressure if the European Central Bank does not keep pace with the Federal Reserve in raising rates and supporting the currency.

What went up in 2022, came down; gas prices are likely to go up again in 2023, but without the same gravitational pull come winter.

Figure 1. Dutch TTF Natural Gas Futures, EUR/MWh

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Source: Bloomberg; as of 31 December 2022.

Figure 2. Natural Gas Storage in Europe, Filling Level (%)

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Source: Bloomberg; as of 31 December 2022.

Over and Out? Crypto Futures and the End of the Reinflating Bubble

They say that all good things must come to an end. But one thing that has refused to obey the maxim is cryptocurrency, with the price of bitcoin repeatedly crashing, yet reinflating once more.

But after a brutal 2022, in which bitcoin fell from a high above $45,000 to nearly $15,000, could 2023 be the year that the bubble stops reinflating?

The clue may be in futures prices (Figure 3). After previous selloffs, we have seen sharp recoveries in bitcoin futures. However, futures prices remain grounded, some $30,000 lower than in March 2022, and have shown little recovery after a sharp selloff in November.

So far, the volatility of cryptocurrency has offered consistent opportunity for Momentum traders. However, with no uptick in futures to indicate a price recovery, will 2023 be the year that the crypto trend remains firmly to the downside?

Figure 3. Bitcoin CME Futures

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Source: Bloomberg; as of 12 January 2023.

Inflated Volatility

Amid the many major market developments in 2022, a smaller change that may have been overlooked is that S&P 500 option expiries were expanded from three a week to one every day of the week.

As researchers, this gives us greater insight into volatility around specific events: we can now back out market expectations of event volatility much more precisely. For an applied example, consider the implied S&P 500 volatility ahead of the US CPI releases in November and December last year and January this year (Figure 4). Whether we look at these data as annualised volatility, a percentage of realised volatility or a percentage of VIX, we see a similar pattern of escalation in the days prior to the print.

The same technique can be used on earnings announcements, the electoral calendar, or any other scheduled market event. Understanding these trends in volatility can help us manage risk more effectively.

Figure 4. SPX One-Day Implied Standard Deviation for 10 November, 13 December and 12 January US CPI Prints

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Source: Man AHL; as of 10 January 2023.


With contributions from Edward Hoyle (Man AHL – Head of Macro), Guillaume Andrieux (Man AHL – Head of Volatility), and Fedor Gorokhovik (Man AHL – Senior Quant)

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