Energy traders were abuzz last Friday as reports circulated that Houston-based hedge fund Saracen Energy Partners LP was the latest to join the ranks of organizations that have recently recorded large losses on wrong-way trades in the natural gas futures market. Some traders pointed to the fallout as explanation for last week’s spike in natural gas futures.
According to a Reuters report, the fund recorded significant loses this week in natural gas futures as it unwound “unfavorable positions.” Saracen did not return NGI‘s calls for comment by press time.
One New York Mercantile Exchange floor trader said the losses could have been as great as $400 million at the fund, which is valued at $1.3 billion. Despite the hit, the trader said he had also heard that the fund’s viability was not impaired.
As a company that may have bet big on natural gas and lost millions, Saracen could be joining the likes of Amaranth (see NGI, Sept. 25, 2006), Bank of Montreal (see NGI, May 21, 2007; April 30, 2007) and MotherRock (see NGI, Aug. 7, 2006).
“From what I am hearing, Saracen got in trouble on March-April and October-January natural gas spreads. People put these positions on and end up over-positioning them,” said Ed Kennedy, a broker with Commercial Brokerage Corp. in Miami. “The young fellows haven’t learned that conservation of equity is the name of the game and they end up overtrading. You saw it at Amaranth and MotherRock and the Bank of Montreal, and now we are seeing it here.
“You trade your equity, not your ego,” the broker added. “It is much like the people who made millions just buying the dot-coms in the late 90s. They couldn’t lose because all they had to do was buy it and it kept going up, but then the other shoe fell and they found out they weren’t real traders at all. They were just lucky. Amaranth was betting on an active hurricane season. They ended up getting an active season, but nothing hit land. These companies seem to miss these little points, and I think this is probably just another one of them.”
As for the repercussions on the natural gas futures market, Kennedy said he thinks it has already unfolded. “I think we have already seen the impact from this on prices,” he said. “It is probably why we saw prices move higher in the determined fashion they did over the past week.”
March natural gas hit a high of $8.820 during the week, which is the highest a prompt-month contract has traded in 14 months. For the week, March natural gas futures gained 35.9 cents to close Friday at $8.660. The gains pushed prompt-month futures out of its recent comfort trading range between $7.500 and $8.500.
In April 2004 (see NGI, April 19, 2004) Saracen purchased Tulsa, OK-based Williams Companies Inc.’s domestic petroleum trading and marketing unit for $23 million plus the assumption of future obligations of about $16.5 million. The assets, which were included in Williams’ power segment, included transportation contracts, forward purchase and sale contracts and inventory.
Saracen was founded by former Vitol Group Vice Chairman Neil Kelley and former Vitol Gas & Electric President Michael Kutsch to make targeted investments in the energy sector. Saracen’s initial focus was to establish a petroleum marketing business in the Midwest with the broader goal of establishing a multi-commodity energy trading and marketing company. In 2004 the company said it would participate in the physical and financial energy markets in North America, with a customer-focused strategy to capture and protect value around energy transportation, storage and conversion assets.
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