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Hedge Funds Cut Bets on Rising Gas by 23% as Prices Fall: Energy Markets

Date: Monday, August 16, 2010
Author: Asjylyn Loder, Bloomberg

Hedge funds slashed their bets on rising natural gas to the lowest level this year as prices fell, a sign the fuel may repeat last year’s 19 percent August slide during a so-far quiet hurricane season in the Gulf of Mexico.

Hedge funds and other large speculators cut their bullish bets by 23 percent in the week ended Aug. 10, the Commodity Futures Trading Commission reported. Natural Gas has declined 13 percent this month, dropping to $4.303 per million British thermal units at 8:04 a.m. on the New York Mercantile Exchange.

Investors retreated from gas markets this year as prices declined 22 percent amid forecasts that stockpiles will be near record highs by the end of October. Demand for the fuel will be slow to recover as consumer confidence hovers near an eight- month low.

“Last year, we saw prices go significantly below $4,” said Andy Lipow, president of consulting firm Lipow Oil Associates LLC in Houston. “There’s a significant amount of supply out there and the overall economy is really having trouble recovering and growing. The increases in demand for natural gas are going to be slower than people expect.”

Net-long positions in futures and options combined in four natural-gas contracts decreased by 28,719 futures equivalents, or 23 percent, to 94,058 in the week ended Aug. 10, the CFTC data showed.

Whether hedge funds and other large speculators will profit from their short bets remains to be seen, Lipow said.

“We’ve seen funds be big winners and big losers in the natural gas markets,” Lipow said.

Gas futures last year dropped to $2.508 per million Btu on Sept. 3, the lowest price in more than seven years.

Vulnerable Positions

The increase in short positions leaves hedge funds vulnerable to sharp moves higher in prices that would probably accompany the threat of a hurricane heading toward the Gulf of Mexico, said Teri Viswanath, director of commodities research at Credit Suisse Securities USA in Houston.

“We’re right around the corner from the heaviest portion of the hurricane season,” Viswanath said. “Given that possibility, is the market getting ripe for a short squeeze? I think it is.”

The U.S. on Aug. 5 reduced its forecast for the 2010 Atlantic hurricane season to 14 to 20 named storms, down from 14 to 23, because of less activity than expected in the first two months of the season.

Eight to 12 of those storms are expected to become hurricanes, according to Gerry Bell, the lead seasonal hurricane forecaster for the U.S. Climate Prediction Center in Camp Springs, Maryland.

Reduced Gulf Output

The sluggish economy, combined with rising production and inventories, will continue to weigh on gas, Lipow said. The bullish impact of any hurricane will be muted since the Gulf of Mexico accounts for 10 percent of U.S. gas production, down from 17 percent in 2005.

Consumer spending, which makes up 70 percent of the world’s largest economy, may not pick up in the absence of a recovery in the labor market, according to the Federal Reserve. Fed policy makers last week made their first attempt to shore up a recovery they said was likely to be “more modest” than earlier anticipated.

Natural gas inventories rose 37 billion cubic feet to 2.985 trillion in the week ended Aug. 6, the Energy Department reported Aug. 12. U.S. gas stockpiles at the end of October may reach 3.752 trillion cubic feet, the department said in an outlook on Aug. 10. Supplies touched a record 3.84 trillion cubic feet in November 2009.

Price Pressure

“Pressure is likely to continue on the natural gas prices,” Lipow said. “Supply disruptions are minimal and we’re seeing the forecast for storms decline.”

The Atlantic hurricane season so far has had less of an impact than expected on gas production, the department said in the outlook last week. Hurricane Alex and Tropical Storm Bonnie this year reduced production by 8 billion cubic feet, less than the 20 billion the government had expected, the report showed.

The funds’ “view of the market is bearish,” said Tim Evans, an energy analyst at City Futures Perspective in New York. “It’s a flow of selling that has weighed on prices, and we’ve got to get through that before prices can rise.”

The measure of net longs includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swaps, Nymex Henry Hub Penultimate Swaps, and ICE Henry Hub Swaps. Henry Hub in Erath, Louisiana, is the delivery point for the Nymex futures, a benchmark price for the fuel.

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net