Hedge funds cut bullish bets on natural gas to the lowest level this year, a sign that prices may be bottoming if history is a guide.
Hedge funds and other large speculators reduced wagers on rising prices for the third straight week in the seven days ended Aug. 24, lowering them by 16 percent, according to data from the Commodity Futures Trading Commission. Gas rallied 63 percent last September, following the Sept. 7 Labor Day holiday and relative strength charts watched by analysts show a similar rebound is possible this year.
The prospect of utilities switching to gas from coal and hurricanes disrupting production in the Gulf of Mexico is raising speculation prices will rebound, according to Teri Viswanath at Credit Suisse Securities USA. Investors abandoned gas markets this year, sending prices to an 11-month low last week, amid forecasts that stockpiles will be near record highs by the end of October.
“This is as bearish as we get,” said Teri Viswanath, director of commodities research at Credit Suisse in Houston. “That same mentality occurred last year between now and Labor Day, and then there was a V-shaped recovery in price.”
Natural gas rose for only the fifth day this month, gaining 10.7 cents, or 2.9 percent, to settle at $3.812 per million British thermal units on the New York Mercantile Exchange. Futures are down 23 percent this month compared with a 19 percent drop last August.
The fuel’s 14-day relative-strength index slipped to 21.5 on Aug. 27, the third straight day it stayed below 30. Relative strength indexes are used by technical analysts to determine when a security has fallen or risen too far. A reading of 30 typically signals prices will increase, while 70 often indicates they will decline. Gas has risen in seven of the last 10 Septembers, according to data compiled by Bloomberg. The index dropped to 28.9 on Sept. 3, 2009, before rising to 66.9 by Oct. 10 last year.
“We’re going to see a rebound in prices going into the winter demand season,” said Hamza Khan, an analyst at the Schork Group in Villanova Pennsylvania. “Just as gasoline prices rise before the summer driving-demand season, natural gas prices rise before heating season.”
The most active part of the Atlantic hurricane season is from Aug. 20 to about Oct. 20, according to William Gray, who pioneered seasonal forecasts at Colorado State University in Fort Collins.
Two storms have formed since Aug. 20, including Hurricane Danielle, the strongest of the season to date with maximum sustained winds of 135 miles per hour. Prior to the season, weather software maker WSI Inc. of Andover, Massachusetts predicted the Gulf of Mexico had a 50 percent chance of being struck by a hurricane. In May, before the June 1 start of the season, researchers at Florida State University said there was an 89 percent likelihood that a cyclone would come ashore.
Net-long positions in futures and options combined in four natural-gas contracts decreased by 14,702 futures equivalents to 75,243 in the week ended Aug. 24, the CFTC data showed.
“The market is getting ahead of itself, too far ahead of itself,” Viswanath said. “The problem with all of these guys is that we’re getting into what has been a very volatile month for supply.”
Natural-gas prices fell to an intraday low of $2.409 on Sept. 4 last year, the lowest level in more than seven years, before doubling to end the month at $4.841.
The declining number of gas-drilling rigs may also send prices higher, Viswanath said.
U.S. rigs dropped for a second week, dropping by 12 to 973 last week, according to an Aug. 27 report from Baker Hughes Inc. The figure is 39 percent higher than a year earlier.
The measure of natural-gas 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 the Nymex futures, a benchmark price for the fuel.
Hedge funds cut bullish bets in gasoline and crude for the second straight week, while positions in heating oil fell to their most bearish since March 2007, according to the CFTC data.
Net-long positions in crude futures and options combined slid by 28 percent the week ended Aug. 24 to 82,024 contracts. For gasoline, they dropped 87 percent to 1,296 contracts, the lowest level since February 2007. Net longs in heating oil dropped to minus 8,365 contracts.
“Many of the funds are looking at the inventories, and when you have heating-oil inventories at their highest since 1983 and gasoline inventories at a 20-year-high, I imagine that some of them are short,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.
Inventories of crude and fuel products increased to 1.14 billion barrels last week, the highest level since the Energy Department began keeping combined weekly data in January 1990, according to an Aug. 25 report.
Crude for October delivery fell 47 cents, or 0.6 percent, to settle at $74.70 on the Nymex. Heating oil fell 1.91 cents, or 0.9 percent, to $2.0252 a gallon, while gasoline dropped 1.38 cents to $1.9341 a gallon.
“It’s likely that next week we’ll see an uptick as they start adding back to their positions,” Lipow said.