Hedge Fund Bullish Gas Bets Collide With Dropping Prices: Energy Markets

Hedge funds raised bullish bets on natural gas to a four-month high in the U.S. just as weather warmed, pushing heating fuel to its biggest weekly decline since August.

The funds and other large speculators increased net-long positions, or wagers on rising prices, by 7 percent in the seven days ended Dec. 14 to the highest level since August, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report.

While forecasts for cold weather in the eastern and central U.S. and dropping stockpiles drove futures up 4.9 percent to $4.606 per million British thermal units on Dec. 8, the outlook changed, causing prices to fall 8 percent for the week. Natural gas may fall again this week as warmer weather limits demand, a Bloomberg News survey showed Dec. 17.

“It was risky to bet that the cold front would hold, and unfortunately for them, it didn’t,” said Hamza Khan, an analyst at the Schork Group Inc., a consulting company in Villanova, Pennsylvania.

Natural gas for January delivery rose 17.1 cents, or 4.2 percent, to settle at $4.237 on the New York Mercantile Exchange. Last week’s drop was the largest weekly decline since Aug. 27. The fuel is down 24 percent this year as reserves climbed to a record high.

The U.S. Energy Department reported Dec. 16 that in the week ended Dec. 10, stockpiles were at a surplus of 9.9 percent to the five-year average from 9.8 percent above a week earlier. About 52 percent of U.S. households use the fuel for heating, according to the department.

Below Normal

On Dec. 8, Commodity Weather Group in Bethesda, Maryland, forecast temperatures might be below normal across most of the Northeast, Midwest and Southeast through Dec. 17 and in the Southeast and parts of the Midwest Dec. 18 to Dec. 22. Futures fell to a two-week low Dec. 15 after the company predicted normal or warmer-than-normal weather for most of the Northeast and Midwest from Dec. 25 to Dec. 29.

Hedge funds bet that the cold would keep prices above $4.55, and perhaps spur a run to $5, said Brad Florer, a trader at Kottke Associates Inc., an energy trading firm in Louisville, Kentucky.

“The temperatures moderated, and that has put pressure back on the market,” Florer said. “Ultimately this market is still in a downtrend long term. We haven’t been able to break out of it. Every time we try to force a move upward, it stalls.”

Falling Prices

Eight of 18 analysts, or 44 percent, forecast that gas futures will decline on the New York Mercantile Exchange through Dec. 23, the Bloomberg survey showed. Seven, or 39 percent, said futures will rise, and three predicted that prices will stay the same. Last week, 55 percent of participants said gas prices would increase.

Net-long positions held by managed money, including hedge funds, commodity pools and commodity-trading advisers, in futures and options combined in four natural-gas contracts increased by 7,051 futures equivalents to 107,618 in the week ended Dec. 14. It was the highest level since the seven days ended Aug. 6, the CFTC report showed.

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.

“The real question now is whether the winter peak for pricing is behind us, and I wouldn’t be surprised to find that it is,” Khan said. If higher-than-normal temperatures persist, prices may not rise above $5, he said.

Chicago Weather

Low temperatures in Chicago are forecast to reach 27 degrees Fahrenheit (-3 degrees Celsius) today, 6 degrees above normal, according to a forecast from AccuWeather Inc. in State College, Pennsylvania. Minneapolis will fall to 18 degrees, 9 above normal.

“We’ve had this stretch for a couple of weeks of pretty extreme cold,” Florer said. “It doesn’t seem to matter as far as our gas storage situation, and that has definitely got to concern bulls in this market.”

Natural gas stockpiles reached a record of 3.843 trillion cubic feet in November. Stores fell 164 billion cubic feet in the week ended Dec. 10 to 3.561 trillion, the Energy Department said last week. It was more than the five-year average of 153 billion, though less than the 165 billion analysts forecast and not enough to keep the surplus from rising from the five-year average.

Fuel Surplus

Inventories will total 1.833 trillion cubic feet at the end of the winter heating season in March, about 171 billion cubic feet higher than at the end of March 2010, the Energy Department said Dec. 7 in its monthly Short-Term Energy Outlook report.

U.S. natural gas production may reach a record high of 62.09 billion cubic feet a day this year, the department said.

In other markets, bullish, or long, bets on gasoline prices fell 2.2 percent to 66,941 futures and options combined, the CFTC data showed. It was the first decline in six weeks. Net- long bets on heating oil shrank by 14 percent to 36,589.

Net-long positions in oil declined by 917 futures and options combined, or 0.4 percent, to 205,890, according to the CFTC report.

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net.

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net.

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