After six weeks of deepening bearish sentiment in the natural gas market, bulls are finally gaining some ground.
Hedge funds cut their net-short position in four gas contracts for the first time in seven weeks, trimming them by 43 percent in the week ended May 5, U.S. Commodity Futures Trading Commission data show. Short contracts slumped 9 percent while long wagers advanced 5.4 percent.
Gas has rebounded from the lowest prices in almost three years as hotter-than-normal weather in the eastern U.S. increased demand from power plants. Deliveries to generators also climbed as low prices prompted s switch from coal.
“The market seemed to get too one-sided,” said Gene McGillian, senior analyst and broker at Tradition Energy in Stamford, Connecticut. “The forecasts turned hot, and there’s been some cooling demand. We haven’t been able to attract a lot of new selling.”
Futures rose 26.3 cents, or 10 percent, to $2.78 per million British thermal units on the New York Mercantile Exchange in the period covered by the CFTC report. Prices settled at $2.88 Friday, the highest close since March 18. Gas has rebounded from $2.443 on April 27, the lowest intraday price since June 2012.
Temperatures may be mostly above normal in the eastern half of the U.S. through May 22, MDA Weather Services said. Deliveries to power plants advanced 16 percent from a year ago to 25.2 billion cubic feet a day as of Friday, according to LCI Energy Insight in El Paso, Texas.
The high in New York on May 12 will be 86 degrees Fahrenheit (30 Celsius), 16 more than usual, AccuWeather Inc. said. Atlanta temperatures may advance to 87 degrees, 8 higher than average.
Power plants account for 32 percent of U.S. gas demand, Energy Information Administration data show.
“Looking forward, above-normal temperatures are going to be bullish because of cooling demand,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “We may have found a price level that represents support for the market.”
Gas consumption may climb 3.9 percent this year to average
76.34 billion cubic feet a day, driven by power plants and industrial users, the EIA said in an April 7 report. Industrial consumption may advance 5 percent to 22 billion a day as new plants that manufacture fertilizer and chemicals start up.
Net-short positions in four U.S. natural gas contracts held by money managers fell by 53,924 futures equivalents to 72,225 in the week ended May 5, according to the CFTC. Long positions expanded by 15,993 to 310,337, while bearish bets dropped by 37,931 to 382,562.
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.
The rally in gas may lose momentum as higher prices reduce demand for fuel to produce power, McGillian said. Gas production may gain 5 percent to average a record 78.47 billion cubic feet a day this year, government data show.
“Falling demand and near-record production won’t make for a sustained rally,” he said. “There’s increasing uncertainty about where gas prices are headed.”