Funds exiting nat gas despite rally

Hedge funds are betting that the rally in U.S. natural-gas prices won’t last.

Money managers cut the combined net-long position across four benchmark contracts by 21% in the week ended Aug. 5, after 15 weeks of above-average stockpile increases. Bullish wagers retreated to an 18-month low even as futures traded in New York gained 2.3% in the report week, U.S. Commodity Futures Trading Commission data show.

Goldman Sachs Group Inc. cut its price forecast last week as shale-gas production in the eastern U.S. surged to an all-time high. Power demand in June and July fell to five-year seasonal lows amid unusually cool weather from Texas to Boston, Edison Electric Institute data show. Gas futures have dropped 12% since the start of summer.

“If you are a money manager and you see above-average storage injections week after week and a decline in price, selling is rational,” Tim Evans, an energy analyst at Citi Futures in New York, said by phone Aug. 8. “There’s no massive heat wave consistently across the U.S. that is going to spike air-conditioning demand, and we continue to see production numbers that show robust growth.”

Natural gas (NYMEX:RBQ14) advanced 8.9 cents to $3.897 per million British thermal units on the New York Mercantile Exchange in the period covered by the CFTC report. The contract for September delivery closed at $3.962 on Aug. 8. Prices were up 0.8% at $3.995 at 9:24 a.m. today.

Stockpile Gains

Gas inventories rose by 1.567 trillion cubic feet since late March to 2.389 trillion on Aug. 1, the fastest pace of storage injections for the period in U.S. Energy Information Administration data going back to 1994. A deficit to the five-year average narrowed to 20% from a record 55%.

Power generation in the lower 48 states averaged 83,230 gigawatt-hours from June through July, the least for these months since 2009, Edison Electric data show.

“Extreme heat that would normally cause a lot of A/C demand has not materialized at all,” Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston, said by phone Aug. 7.

Goldman Sachs

Goldman Sachs reduced its outlook for the fourth quarter to $4 from $4.25, Brian Singer, a New York-based analyst with the bank, wrote in an Aug. 8 note.

Below-normal temperatures in eastern states through Aug. 17 will be followed by above-average readings along the East Coast, said MDA Weather Services in Gaithersburg, Maryland.

The EIA says record production will help boost U.S. supplies to 3.431 trillion cubic feet by the end of October as new wells come online at shale deposits such as the Marcellus in the Northeast, where daily output topped 15 billion cubic feet for the first time last month.

In other markets, net-long positions in benchmark West Texas Intermediate crude fell by 40,360 contracts, or 15%, to 236,381 futures and options. Longs fell 7.3%, while shorts surged 56%. WTI dropped 3.6% to $97.38 a barrel in the report week.

WTI (NYMEX:CLQ14) futures climbed as much as $1.11 on Aug. 8 as U.S. warplanes attacked Islamic State militants in Iraq, before settling 31 cents higher at $97.65. Prices were up 21 cents to $97.86 at 9:25 a.m. today in New York.

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