Gas Bulls Head for Exit as Mild Weather Signals Glut Deja Vu

Hedge funds are dumping bullish natural gas positions as a slow start to winter signals a return to the 2012 supply glut that sent prices to a 10-year low.

Gas has tumbled about 23 percent in December, heading for the biggest monthly drop since 2008, after surging production and milder weather erased a record stockpile deficit.

U.S. gas production is forecast to expand 5.5 percent this year to a fourth consecutive annual record, leaving prices vulnerable to further declines if a frigid winter fails to arrive. Hedge funds have cut their bullish gas wagers by 74 percent this month to the lowest seasonal level since 2011, just before prices plunged below $2 per million British thermal units.

“If heating demand doesn’t start to pick up, we’re going to be below $3 by the end of January,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Supplies are formidable.”

Natural gas for January delivery fell 32 cents to $3.144 per million British thermal units yesterday on the New York Mercantile Exchange, the lowest settlement since Jan. 9, 2013. Futures hovered near that mark today.

Gas Stockpiles

Gas inventories totaled 3.295 trillion cubic feet as of Dec. 12, 47 billion more than a year earlier, government data show. The surplus will “balloon to just shy of 200 billion cubic feet” by the start of 2015, Scott Speaker, an analyst at JPMorgan Chase & Co. in New York, said in a Dec. 18 report.

Temperatures may be above normal in the eastern U.S. from Dec. 23 to Dec. 27 and then seasonal through Jan. 1, according to Commodity Weather Group LLC in Bethesda, Maryland. An earlier outlook, released by the company in late November, showed colder-than-average weather in the eastern half of the country in December.

About 49 percent of U.S. households use gas for heating, according to the Energy Information Administration, the Energy Department’s statistical arm.

Stockpiles at the end of March will be about 40 percent above a year earlier, after a frigid winter left supplies at the lowest level since 2003.

Challenge Ahead

“Traders are discussing the prospect of inventories ending the heating season at 2 trillion cubic feet, which is considered the breaking point for prices,” said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York. “It’s going to be a challenge to manage that level of supply.”

Production will surge to a 74.26 billion cubic feet a day this year, EIA data show. Output from the Marcellus shale formation in the Northeast may rise 19 percent in January from a year earlier, the agency said Dec. 8.

Hedge funds’ net-long wagers on U.S. natural gas fell 36 percent to 27,260 lots in the week ended Dec. 16, the lowest since October, the Commodity Futures Trading Commission said Dec. 19. 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.

“Production is so high that we’re going to need to see some cold weather and some supply bottlenecks to support prices,” Again Capital’s Kilduff said. “It’s a complete paradigm shift from the deficit we had at the end of last winter.”

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