Hedge Funds Raise Natural Gas Wagers to Four-Month High: Energy Markets

Date: Tuesday, November 30, 2010
Author: Asjylyn Loder, Bloomberg

Hedge funds increased bullish bets on natural gas to the highest level in four months on speculation that lower-than-normal temperatures will bolster heating demand and trigger withdrawals from record stockpiles.

The funds and other large speculators increased so-called net-long positions, or wagers on rising prices, by 50 percent in the seven days ended Nov. 23, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report.

Prices rose 12 percent to $4.264 per million British thermal units that week as falling temperatures sent inventories to their first decline since March. Demand for gas, which peaks during the cold-weather months, drove futures above $6 per million Btu last January. About 52 percent of U.S. households use the fuel for heating, according to the Energy Department.

“You had these forecasts for lower-than-seasonal temperatures that motivated buyers to be a little more aggressive than they might have been otherwise,” said Tim Evans, an analyst with Citi Futures Perspective in New York.

Gas stockpiles in the U.S. fell 6 billion cubic feet in the week ended Nov. 19 to 3.837 trillion cubic feet after reaching a record 3.843 trillion cubic feet the week before, an Energy Department report last week showed. After the decline, the total was 9.5 percent above the five-year average for the period.

Colder-than-normal weather may blanket most of the eastern and central U.S. from Dec. 4 through Dec. 8, according to Commodity Weather Group in Bethesda, Maryland. Temperatures may be below-normal in the Southeast from Dec. 9 through Dec. 13 and normal in the Northeast and most of the Midwest during that period.

Wholesale Price

Wholesale natural gas at the benchmark Henry Hub in Erath, Louisiana, rose 34 cents, or 8.9 percent, to $4.17 per million Btu yesterday, according to data compiled by Bloomberg.

Natural gas for January delivery fell 18.9 cents yesterday, or 4.3 percent, to settle at $4.21 per million Btu on the New York Mercantile Exchange. It was the biggest decline in the futures in four weeks. The contract was little changed as of 10:50 a.m. London time today.

Traders who followed the rising trend in natural gas prices and increased bullish bets may have bought as prices peaked, said Phil Flynn, an analyst with PFGBest in Chicago.

“It’s fool’s gold,” said Flynn. “You’re probably going to see them reduce their positions. The weather wasn’t as cold as some people were forecasting and now you’re seeing it reverse.”

Production Increase

U.S. natural gas production rose 3.7 percent in September as output from onshore wells increased, the Energy Department reported yesterday. Output in the lower 48 states rose 0.7 percent to 66.33 billion cubic feet a day from a revised 65.85 billion, the government said in the report. Production in Louisiana increased 1.5 percent to 6.59 billion cubic feet a day, according to the report.

Net-long positions in futures and options combined in four natural-gas contracts climbed for a fourth week, rising by 27,292.5 futures equivalents to 82,084.25 in the week ended Nov. 23, the CFTC report showed. It was the highest level since August. The positions are held by what the CFTC categorizes as managed money, including hedge funds, commodity pools and commodity-trading advisers.

‘New Situation’

“Managed money is starting to believe that we have a new situation in natural gas,” said Peter Beutel, president of Cameron Hanover Inc., an energy adviser in New Canaan, Connecticut.

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 Nymex futures, a benchmark price for the fuel.

In other markets, managed money’s bullish, or long, bets on gasoline prices rose 0.1 percent to 62,739 futures and options combined, the CFTC data showed. Net-long bets on heating oil fell 49 percent, or 25,920 futures and options combined, to 26,926.

Net-long positions in crude oil dropped by 38,654 futures and options combined, or 22 percent, to 139,743 the week ended Nov. 23, according to the commission report.

-- With assistance from Christine Buurma in New York. Editors: Dan Stets, Bill Banker

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