Thursday, May 3, 2012

The "King of Natural Gas" Retires

No, not Aubrey McClendon.  John Arnold, founder of the Centaurus commodity trading hedge fund, is retiring and closing his fund. Arnold has gained great wealth over the past 17 years trading natural gas, first at Enron then at his own fund. His reasons for quitting were not specifically enunciated, but the pressure to maintain big returns, the greater regulation on commodity traders and the very low price of natural gas probably played a part.

But I have to wonder if the biggest reason is the lack of price volatility in the natural gas market. Speculators love volatility because it creates opportunities to exploit for great gain (or spectacular losses; see: Amaranth Advisors). Over the past few years, shale gas has flooded the market, suppressing prices and making the market much more predictable. While nobody can predict future prices with certainty, it definitely has gotten easier to make predictions and the whipsaw volatility that speculators love is harder to find. A Gulf of Mexico hurricane isn't going to cause a $3/MMBtu natural gas price increase overnight.

Natural gas has become more predictable and boring. The customers love it, but the speculators have to hate it.

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