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Hedge Fund Gas Bets Climb to Three-Month High in Futures: Energy Markets

Date: Tuesday, May 3, 2011
Author: Christine Buurma, Bloomberg

Hedge funds increased bullish bets on natural gas to the highest level in three months on smaller- than-expected stockpile gains and speculation that reduced nuclear output will spur demand for the power-plant fuel.

The funds and other large investors increased wagers on rising prices by 38 percent in the seven days ended April 26 to the most since Jan. 25, according to the Commodity Futures Trading Commission’s Commitments of Traders report.

Futures climbed 6.5 percent last week after government data showed inventories increased 1.9 percent, less than the 2.3 percent estimated by analysts, in the week ended April 22. Prices also advanced as seasonal maintenance and shutdowns after the worst day of tornadoes in 37 years brought nuclear generation to the lowest level since Oct. 26, 2000.

“Nuclear-power shutdowns and maintenance have boosted physical demand for gas, and inventories are down year over year,” said Jason Schenker, the president of Prestige Economics LLC in Austin, Texas. “That’s engendered some upward momentum for the market.”

Natural gas rose 12.5 cents, or 2.9 percent, to $4.387 per million British thermal units on the New York Mercantile Exchange during the week covered by the report. It has advanced 30.6 cents, or 7 percent, since then to settle at $4.693 today in New York.

The Energy Department reported gas inventories rose 47 billion cubic feet in the week ended April 15, below the 52 billion analysts predicted in estimates compiled by Bloomberg.

Supply Shortfall

Stockpiles increased 31 billion cubic feet in the week ended April 22, less than the 38 billion analysts had estimated. Inventories totaled 1.685 trillion, 0.6 percent below the five- year average and 11 percent below levels a year earlier. The year-on-year shortfall was the widest since Aug. 8, 2008.

Nuclear-power plants generated 72,898 megawatts, or 72 percent of capacity, on April 26, almost the lowest level in four and a half years, according to a Nuclear Regulatory Commission report and data compiled by Bloomberg. Twenty-six of the nation’s 104 reactors were offline. Nuclear plants typically refuel in the spring and fall, when weather-driven demand for power is lowest.

Atomic power generates 20 percent of U.S. electricity while natural gas accounts for 20.4 percent, according to an April 14 report from the Energy Department.

Output fell to the lowest level in more than 10 years on April 28 after storms spawning tornadoes knocked out power to the Tennessee Valley Authority’s Browns Ferry plant in Alabama. The storms killed more than 300 people, according to the Associated Press.

Browns Ferry

The Tennessee Valley Authority declared an “unusual event” at Browns Ferry after thunderstorms and high winds damaged offsite power supplies, requiring the shutdown. The plant is 84 miles (135 kilometers) north of Birmingham. An unusual event is the lowest of four categories in the NRC’s emergency classification system.

The 1,065-megawatt Unit 1, the 1,104-megawatt Unit 2 and the 1,115-megawatt Unit 3 are in “hot” standby, meaning they are at operating pressure and temperature. The reactors remained shut as of April 29, according to an NRC report.

“If a nuclear plant is shut down because of a tornado, it’s an extraordinary event,” said Jay Levine, president of Enerjay LLC, a Portland, Maine-based brokerage. “In the natural gas market, people tend to want to buy first and ask questions later.”

Warm Weather

Cooling degree days in the U.S. were 33 percent above normal for the week ended April 23, according to David Salmon, a meteorologist with Weather Derivatives in Belton, Missouri, also contributing to the price gains. Degree days are used as a measure of demand for power and natural gas.

The high temperature in Houston on April 22 was 88 degrees Fahrenheit (31 Celsius), 8 above normal, according to AccuWeather Inc. in State College, Pennsylvania. Above-normal temperatures are likely in the southern U.S. from May 9 through May 13, according to MDA EarthSat Weather in Rockville, Maryland.

Power plants use 30 percent of the nation’s gas supplies, according to the Energy Department.

Net-long positions in natural gas held by managed money, including hedge funds, commodity pools and commodity-trading advisers, in futures and options combined in four natural-gas contracts rose by 36,398 futures equivalents to 131,637 in the week ended April 26.

Gas Contracts

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, bullish, or long, bets on gasoline fell 1.1 percent to 62,279 futures and options combined, the CFTC data showed. Bets on heating oil rose by 4,130, or 13 percent, to 37,122, the largest gain since the week ended March 15.

Net-long positions in oil increased 11,202 futures and options combined, or 3.9 percent, to 301,118, according to the CFTC report.

To contact the reporter on this story: Christine Buurma in New York at cbuurma1@bloomberg.net