Hedge Funds Cut Bullish Natural Gas Bets to Lowest This Year

Date: Monday, September 20, 2010
Author: Moming Zhou, Bloomberg

Hedge funds reduced their bets on rising natural gas prices to the lowest level this year as mild weather and a lack of storms in the Gulf of Mexico forced traders to unload their bullish positions.

Hedge funds and other large speculators cut wagers on gas gaining by 16 percent in the seven days ended Sept. 14, according to the weekly Commitments of Traders report from the Commodity Futures Trading Commission. Gas has tumbled 28 percent this year amid rising production from shale formations and a supply glut that air-conditioning demand in the hottest summer in at least 60 years didn’t significantly dent.

“It’s hard to stay long and stay buying when the trend continued to sell off,” said Rich Ilczyszyn, a market strategist at Lind-Waldock, a broker in Chicago. “The weather play is over, and there is no major damage in the Gulf, no major storms.”

Gas prices peaked this summer at $5.196 per million British thermal units on June 16 as forecasts pointed to hotter-than- normal weather and an active hurricane season. Prices have since declined 23 percent, falling in five of the last six weeks, as storms stayed away from major Gulf gas production and temperatures turned lower.

Natural gas for October delivery fell 3.8 cents, or 0.9 percent, to $4.024 per million Btu on Sept. 17 on the New York Mercantile Exchange. The futures dropped to $3.61 on Aug. 27, the lowest level in 11 months.

Gas Contracts

Net-long positions in futures and options combined in four natural-gas contracts decreased by 8,730 futures equivalents to 45,961 in the week ended Sept. 14, the CFTC data showed.

The measure of natural-gas 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.

Temperatures in the U.S. turned lower starting from the second week of September, according to AccuWeather Inc. in State College, Pennsylvania. Daily high temperatures in New York were mostly below 80 degrees Fahrenheit (27 Celsius) last week, according to AccuWeather. The city sweltered under a record 103 degrees on July 6.

“At this time of the year, you are not going to see much cooling demand,” said Brad Florer, a trader at Kottke Associates Inc., an energy trading firm in Louisville, Kentucky.

Power Demand

There were 1,018 population-weighted cooling degree days in the three months ended August, the highest level since 1950, when reliable records began, according to Travis Hartman, a meteorologist at MDA Federal Inc.’s EarthSat Energy Weather, based in Rockville, Maryland.

Cooling degree days, calculated by subtracting a base of 65 degrees from the average daily temperature, is a value designed to show energy demand.

About 23 percent of U.S. electricity is generated using natural gas, according to the Energy Department.

This hurricane season has had less of an impact on gas production in the Gulf than the government expected.

A total of 7.9 billion cubic feet of gas production was shut in from June through August because of storms, down from projections of 57.4 billion, the Energy Department said in its monthly Short-Term Energy Outlook on Sept. 8.

Hurricane Karl landed Sept. 17 in Mexico about 10 miles north of Veracruz as a “major” Category 3 storm, the fifth of the season, according to the National Hurricane Center. Storms so far have spared main Gulf gas production areas.

Gas Production

About 10 percent of U.S. gas output will come from federal waters in the Gulf of Mexico this year compared with 17 percent five years ago, according to Energy Department estimates.

U.S. gas stockpiles jumped 103 billion cubic feet in the week ended Sept. 10 to 3.267 trillion, the Energy Department reported last week. A survey of Bloomberg users showed an expected increase of 95 billion. The inventory gain exceeded the five-year average for the first time since April.

The storage increase was the biggest weekly gain for this time of the year since 2006.

A surplus to the five-year average rose for the first time since the week ended April 30, increasing to 6.2 percent from 5.5 percent the previous week. A deficit to year-earlier supplies narrowed to 5.3 percent from 6.5 percent.

Swelling Supplies

Inventories will peak at 3.687 trillion cubic feet before cold-weather demand prompts utilities to pull gas from storage, the department predicted in its monthly Short-Term Energy Outlook. Stockpiles rose to a record 3.837 trillion cubic feet last November.

In other markets, hedge funds boosted their bullish bets in crude, gasoline and heating oil in the same week after a Sept. 9 closure of an Enbridge Energy Partners LP pipeline reduced crude imports to the U.S. from Canada.

Net-long positions in crude futures and options combined jumped by 44 percent in the week ended Sept. 14 to 122,609 contracts. For gasoline, they more than doubled to 15,807 contracts. Net longs in heating oil also more than doubled to 19,262 contracts.

The increase was “probably triggered by the Enbridge pipeline situation,” said Peter Beutel, president of trading advisory company Cameron Hanover Inc. in New Canaan, Connecticut.

Crude for October delivery rose to $77.19 on Sept. 13, the highest settlement since Aug. 11. Prices declined on Sept. 17 for a fourth day after Enbridge said it restarted its pipeline. The October contract fell 91 cents, or 1.2 percent, to $73.66 a barrel.

Heating oil rose 2 cents to $2.0992 a gallon, while gasoline dropped 55 cents to $1.9192 a gallon.

To contact the reporter on this story: Moming Zhou in New York at Mzhou29@bloomberg.net;