Darren Kugler
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Darren Kugler in Commodities,

Hedge Funds Cut Bullish Gas Bets as Volatility Slides

Hedge fund bulls accelerated their withdrawal from U.S. natural gas markets as volatility and prices declined on abundant supply.

Speculators cut their net-long position across four benchmark contracts by 11 percent in the week ended Sept. 2, the most in three weeks, U.S. Commodity Futures Trading Commission data show. Bullish wagers have declined for six consecutive months, the most in data compiled by Bloomberg since 2010. Short positions rose to a nine-month high.

Prices have swung in the narrowest range for this time of year since 2009 as output and stockpiles increased at a record pace. The producers and consumers who trade with speculators have cut their holdings in gas by 25 percent from a record in April 2013, a sign they’re less concerned about price movements.

“There’s just a level of comfort in the marketplace that supply is growing,” Tim Evans, an energy analyst at Citi Futures in New York, said in a Sept. 5 telephone interview. “Consumers may not see a compelling reason to have a larger hedge position than a year ago; producers are not thrilled or motivated.”

Natural gas slipped 2.1 cents, or 0.5 percent, to $3.89 per million British thermal units on the New York Mercantile Exchange in the period covered by the CFTC report. The futures were little changed in today’s electronic trading after dropping 0.7 percent on Sept. 5, capping their biggest weekly decline since February. Prices are down 10 percent this year.

The 100-day average volatility for Nymex front-month gas futures was 29.5 percent on Sept. 5, down from 60.6 percent at the end of April. Open interest in gas futures slid to 951,432 contracts on Aug. 22, the least since Dec. 8, 2011, and down about 40 percent from an all-time high in April 2013.

Making Money

“This type of low volatility, relatively thin markets where prices are range-bound but whipping around during the day, they’re not easy to trade,” Michael Mitton, director of the commodity investor team at BNP Paribas SA in New York, said in an Aug. 22 phone interview. “It definitely makes it more difficult for traders to make money.”

Prices are down from their winter highs as mild weather crimped demand from power plants. June through August was the coolest for the months since 2009, based on population- and energy-weighted demand, Matt Rogers, president of Commodity Weather Group LLC in Bethesda,Maryland, said in a Sept. 5 e-mail. Electricity generators account for 31 percent of U.S. gas consumption, according to government data.

Above Average

Gas inventories have climbed 1.887 trillion cubic feet from an 11-year low in March to 2.709 trillion on Aug. 29, the fastest pace for the period in Energy Information Administration data going back to 1994. Gains have topped five-year weekly averages for 20 straight weeks, narrowing a supplydeficit to 15 percent from a record 55 percent in March.

U.S. gas production is rising toward a fourth straight annual record as new wells come online at shale deposits. Output from the Marcellus field in the Northeast will average 15.9 billion cubic feet a day this month, up 31 percent from a year ago, according to the EIA.

In other markets, speculators are the least bullish on U.S. crude prices in more than 17 months as output rises while economies from Europe to China show signs of slowing.

Futures dropped to the lowest level since January as money managers reduced net-long positions in West Texas Intermediate, according to the CFTC data. Net-longs for WTI slipped 17,396 futures and options, or 9.2 percent, to 172,357 in the seven days ended Sept. 2. Longs fell 0.8 percent to 252,909, the least since May 2013, while shorts climbed 23 percent to 80,552, the highest level since December 2012.

Crude Oil

Crude declined 98 cents, or 1 percent to $92.88 a barrel on the Nymex in the period covered by the CFTC report, the lowest settlement since Jan. 14. Prices were little changed in today’s electronic trading after settling at $93.29 on Sept. 5.

Bullish bets on gasoline dropped 1,544 contracts, or 7.9 percent, to 17,900, the lowest since September 2010. Gasoline futures slipped 8 percent to $2.543 a gallon on the New York exchange in the report week.

Regular gasoline at the pump, averaged nationwide, rose to $3.437 a gallon Sept. 5, according to Heathrow, Florida-based AAA, the largest U.S. motoring group. Prices slipped to $3.431 on Aug. 25, the lowest level since February.

Net-short positions in ultra low sulfur diesel increased 42 percent to 17,779 contracts. The fuel dropped 1.7 percent to $2.7967 a gallon in the report week.

Gas Contracts

Net-long positions on four U.S. natural gas contracts declined by 16,709 futures equivalents to 131,448, a three-week low. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel. short positions topped 300,000 for the first time since Dec. 3.

Commercial gas users, including consumers and producers who hedge the fuel, held 1.28 million contracts last week, down from a record 1.7 million on April 23, 2013.

“We are just about at the cusp of a seasonal change, where air-conditioning demand is tapering off and heating demand begins to emerge,” Evans said. “If we have cold early in the season, that can be effective in raising prices.”

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