Hedge Funds Turn Bearish on U.S. NatGas

 

Hedge funds and other money managers cut their net long position in the two main futures and options contracts linked to Henry Hub prices by 765 billion cubic feet in the week to June 6.

 

Fund managers cut their net long position by a total of 1,349 billion cubic feet over the two weeks since May 23, after boosting positions by 1,721 billion cubic feet over the previous 12 weeks (http://tmsnrt.rs/2rRAYZa).

 

By May 23, hedge funds had accumulated a near-record net long position of 3,919 billion cubic feet, according to the U.S. Commodity Futures Trading Commission (http://tmsnrt.rs/2sTeDch).

 

Fund managers had the biggest bullish bias on record, with more than five long positions for every short position (http://tmsnrt.rs/2rmwMwV).

 

But the concentration of hedge fund long positions left prices looking stretched and vulnerable to a correction.

 

Fund managers gambled that strong exports coupled with a new wave of combined-cycle power plants would tighten gas stocks this summer.

 

But instead stocks have risen in line with the normal seasonal pattern as power producers have switched back to burning coal.

 

With ample stocks, the bullish bias among the hedge fund managers was no longer sustainable and a correction became inevitable.

 

TURNING POINT

 

Spot prices and calendar spreads peaked in the middle of May, and started to soften gradually, before tumbling after May 22.

 

Gentle liquidation of long positions by former hedge fund bulls has been accelerated by a new wave of short selling from hedge fund bears anticipating a price correction.

 

Hedge fund long positions were reduced by 453 billion cubic feet over the two weeks ending on June 6, but fund managers also established 896 billion cubic feet of new short positions.

 

Gas prices have fallen sharply to encourage electricity generators to run their gas-fired power plants for more hours and ease back on coal burning.

 

Nearly all the decline in prices has been concentrated in near-dated futures contracts to encourage maximum power burn this summer.

 

The price of gas for delivery at Henry Hub in July 2017 has fallen by more than 40 cents per million British thermal units, around 12 percent, since May 22 (http://tmsnrt.rs/2rRvNIz).

 

By contrast, there has been little change in forward prices, with the price of gas for delivered in July 2018 down by just 2 cents since May 22.

 

Calendar spreads have collapsed, with the backwardation from July 2017 to July 2018 easing from 47 cents on May 22 to just 9 cents on June 12 (http://tmsnrt.rs/2rmq3mx).

 

The sharp reduction in hedge fund long positions and establishment of a significant number of new short ones has left the risks around gas prices looking much more balanced.

 

Gas prices are now much more competitive with coal, which should encourage power producers to run their combined-cycle units for more hours as baseload and limit further downside risks.