Citadel, a $28 billion hedge fund titan, last year traded enough natural gas to meet more than a month of U.S. residential demand, becoming an unusual force in a market dominated by merchants, energy producers and utilities.
Its trading of physical gas makes Chicago-based Citadel, led by Ken Griffin, unique among hedge funds. Other funds limit their gas trading to futures and options contracts, which allow price exposure without the complexity of handling fuel. Citadel buys and sells actual molecules over North American pipelines after establishing a physical gas business in 2014.
Natural gas markets were a moneymaker for commodities hedge funds until new supplies from shale fields started to arrive. But volatility in U.S. gas markets has halved in the past decade, capping the price swings that are opportunities to profit. Prices at pipeline hubs—the domain of physical traders—still move dramatically.
The more than 450 billion cubic feet of gas Citadel bought and sold in the U.S. last year amounted to more than triple its volumes in 2016, according to a new regulatory filing. Total daily U.S. gas consumption for heat, power generation, industry and other uses was 74 billion cu. ft., government data show.
Commodities are one of five investment strategies inside Citadel. The unit is expanding under Sebastian Barrack, who joined a year ago from Macquarie, the Australian bank with a large natural gas trading book.
Last month, Citadel hired about 20 people from London-based energy and weather hedge fund Cumulus, which will shut down.
“We continue to grow our commodities business strategically, and while trading physical natural gas is a little bit unusual for a hedge fund, it is additive to our existing business,” Mr Barrack said.
In 2016, Citadel took over a portfolio of western U.S. gas pipeline capacity from WPX Energy, a shale oil and gas producer.
Documents filed with the Federal Energy Regulatory Commission show that Citadel has contracts to use gas pipelines including Kern River Transmission, which runs from Wyoming to California, and Rockies Express, which runs eastward from Colorado. An energy department report showed it also imported nearly 20 billion cu. ft. of gas to the U.S. from Canada last year.
In 2017, Citadel purchased 475.1 billion cu. ft. and sold 456.3 billion in the U.S. physical market, according to a document it filed to FERC last week. In 2016, the group bought 133.5 billion cu. ft. and sold 118.6 billions.
Larger traders are required to report such volumes to FERC each year. The regulator defines physical transactions as obligations to deliver natural gas at a specified location and time, acknowledging that deals might get unwound before delivery takes place.
Sale volumes from all companies reporting to FERC in 2016 totaled 65.4 trillion cu. ft., according to Cornerstone Research —more than double U.S. consumption.
Citadel’s latest volumes put it in league with physical commodities merchants such as Vitol, which bought 549.7 billion cu. ft. and sold 541.3 billion of wholesale U.S. gas in 2017, it told FERC.
Castleton Commodities International, a big trading house backed by hedge fund luminaries including Paul Tudor Jones and Glenn Dubin, bought 467.1 billion cu. ft. of U.S gas and sold 543.5 billion in 2017, another filing showed.