Hedge funds cut their bullish bets on natural gas to the lowest level this year as expanding stockpiles drove prices to a 13-month low.
The funds and other large speculators cut wagers on rising prices by 36 percent in the seven days ended Oct. 12, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. It was the third week of declines, bringing the reduction since Sept. 21 to 71 percent.
“If somebody looks at fundamentals and sees how much we have in the ground right now, I couldn’t blame them for selling,” said Hamza Khan, an analyst at the Schork Group Inc., a consulting company in Villanova, Pennsylvania.
Natural gas has fallen 38 percent this year as U.S. stockpiles swelled amid rising production from shale deposits and demand failed to accelerate following the recession. An inventory surplus has expanded as air-conditioning use tapers off after summer before demand for winter heating fuel rises.
Contracts for November delivery fell 10.4 cents, or 2.9 percent, to settle at $3.431 per million British thermal units on the New York Mercantile Exchange, the lowest level since Sept. 15, 2009.
The surplus grew for a third week in the seven days ended Oct. 8, the Energy Department said Oct. 14. Stockpiles rose by 91 billion cubic feet to 3.59 trillion cubic feet, 7.4 percent above the five-year average and up from 6.7 percent the previous week.
The number of U.S. rigs climbed 34 percent in the past year to 966 the week ended Oct. 15, up from 721 a year ago, according to data published by Baker Hughes Inc.
Gas output will average 61.29 billion cubic feet a day this year, up from the 61.21 billion estimated in September, the Energy Department said on Oct. 13 in its monthly Short-Term Energy Outlook. Production will be 2.2 percent higher than last year. U.S. gas inventories will peak by the end of this month at 3.726 trillion cubic feet, the Energy Department said.
Production from so-called shale formations rose 71 percent in 2008 from a year earlier to 2.02 trillion cubic feet, according to government data. Shale gas will account for 34 percent of total production in 2035, compared with 18 percent in 2008, Energy Department estimates show. The increased output has cut the need for imports of liquefied natural gas from places such as the Gulf state of Qatar.
“With better technology and all this shale gas, what you see is an immense amount of drilling and that’s adding to the inventories,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.
A milder-than-normal U.S. winter may not produce enough demand to reduce the surplus, weighing on prices, Lipow said.
U.S. temperatures are likely to be higher on average this winter, with 6 percent to 7 percent fewer heating degree days than a year earlier, according to an Oct. 13 forecast from the U.S. Climate Prediction Center.
Declining prices convinced producers to curb output, Khan said. Producers and merchants decreased net-short positions in the Nymex natural gas future to 16,008 in the seven days ended Oct. 12, from 20,638 the week ended Oct. 5, according to the CFTC, indicating that producers sold fewer contracts to deliver the fuel, he said.
“Producers are less willing to hedge prices at these levels, but it’s too little, too late,” Khan said. “At a certain point, Wall Street will ignore the fundamentals and use the trend-is-your-friend principal. If everyone else is selling, you’re selling.”
Hedge funds and other large speculators cut net-long positions in futures and options combined in four natural-gas contracts by 11,445 futures equivalents to 20,034 in the week ended Oct. 12, the lowest level this year, the CFTC data showed.
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 Nymex futures, a benchmark price for the fuel.
Net-long positions in oil held by what the CFTC categorizes as managed money, including hedge funds, commodity pools and commodity-trading advisers, rose by 10,198 futures and options combined to 178,738, according to the CFTC report.
Bullish bets on gasoline prices rose 6,351 futures and options combined to 56,705, the sixth straight weekly increase, the data showed. Net-long positions on heating oil declined 6,324, or 12 percent, to 46,375.