Hedge Funds ‘Bearish With a Capital B’ in Gas: Energy Markets

Hedge funds raised bearish bets on natural gas to the highest level since December 2008 as the fuel plunged on speculation that seasonal inventories will reach near-record levels at the end of March.

The funds and other large speculators increased net-short positions, or wagers on falling prices, in futures on the New York Mercantile Exchange by 27 percent in the seven days ended Feb. 8, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report.

Warming weather coupled with rising production has heightened concern that inventories will end the heating season with a surplus again this year. Natural gas declined 9.3 percent last week on forecasts for higher-than-normal temperatures.

“This great thaw is thawing out the bulls that thought they could run this market,” said Phil Flynn, vice president of research at PFGBest in Chicago. “Even with the last freeze, we couldn’t get above $5. We’re certainly not going to do it now.”

Natural gas for March delivery declined 30.7 cents, or 7.1 percent, in the week covered by the report. The fuel fell 7.6 cents, or 1.9 percent, to settle at $3.91 per million British thermal units on Feb. 11 on the Nymex.

Higher-than-average temperatures will reduce heating consumption this week, said David Salmon, a meteorologist with Weather Derivatives in Belton, Missouri, in a Feb. 11 report. Demand through Feb. 18 will be 17 percent to 31 percent below normal, he said.

New York Highs

New York City will see high temperatures of 55 degrees Fahrenheit (13 degrees Celsius) on Feb. 18, 13 degrees above normal, according to AccuWeather Inc. in State College, Pennsylvania.Chicago will reach 45 degrees, 12 degrees higher than average.

The U.S. is approaching the end of a colder-than-normal winter that boosted heating demand and eroded stockpiles by 30 percent since the start of the year. Since November, heating degree days have been 8 percent above year-ago levels and 12 percent above the long-term average, analysts including Cameron Horwitz at Canaccord Genuity in Houston said in a note to clients Feb. 10.

Traders are closing bets that gas prices will rise before the so-called injection season from April through October, when production usually outpaces demand and inventories rise, Flynn said.

Net Shorts

The net-short position rose to 112,081, the highest since the week ended Dec. 19, 2008. Most of the increase came from the short side of the market, with traders adding 20,123 bets that prices will fall, an increase of 8.4 percent to 259,699, the highest level since Oct. 21, 2008.

Natural gas marketed production in 2011 will average 62.32 billion cubic feet a day in 2011, up from 61.38 billion estimated in January, the Energy Department said Feb. 8 in its monthlyShort-Term Energy Outlook.

“It’s bearish with a capital B,” said Hamza Khan, an analyst with the Schork Group Inc., a consulting company in Villanova, Pennsylvania. “Everyone is looking for heavy production to continue.”

Inventories may total 1.651 trillion cubic feet by the end of March, the Energy Department estimated Feb. 8 in its Short- Term Energy Outlook. Last year’s total as of March 31 was 1.662 trillion, a record for the end of the heating season.

Near Records

The Energy Department “expects near-record high inventories to continue through most of 2011,” with prices averaging $4.16 for the year, 22 cents less than 2010, according to DOE’s monthly outlook.

While warmer weather may leave inventories near a record, colder-than-normal temperatures initially eroded the surplus. Natural gas stockpiles declined by 209 billion cubic feet the week ended Feb. 4 to 2.144 trillion, the Energy Department said Feb. 10. The storage level was 2.1 percent below the five-year average, dropping to a deficit for the first time since Jan. 15, 2010.

Frigid weather throughout the U.S. slowed natural production and transportation during the week covered by the inventory report, leading to a larger-than-expected drop in stockpiles, Khan said.

New Mexico Governor Susana Martinez, a Republican, declared a state of emergency on Feb. 4 due to gas shortages, closing government offices not providing essential services. New Mexico Gas Co. said rolling blackouts in West Texas had cut gas deliveries to the state, forcing interruptions to customers in several towns. Gas shortages were also reported in Arizona andSouthern California.

El Paso Cuts

El Paso Corp. reduced flows because of the cold, limiting supplies to utilities from Texas toCalifornia, the company said Feb. 3. The El Paso said Feb. 5 that pipeline pressure had returned to normal operating levels.

Service interruptions have been resolved, and the dip in inventories below the five-year average is likely to be short- lived, Khan said.

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 declined for a second week, falling by 35,374 futures equivalents, or 33 percent, to 71,625 in the week ended Feb. 8. It was the largest drop in seven weeks.

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 8.3 percent to 59,913 futures and options combined, the CFTC data showed. Net-long bets on heating oil declined by 2.4 percent to 36,443. Net-long positions in oil increased by 442 futures and options combined, or 0.2 percent, to 202,383, according to the CFTC report.

(Source: http://www.bloomberg.com/news/2011-02-14/hedge-funds-turn-bearish-with-a-capital-b-on-natural-gas-energy-markets.html)