Gas Bears Bathing in Shale Glut Raise Net Short Bets to Record

  • Hedge funds raise net-short gas positions to most since 2010
  • Long wagers in U.S. gas contracts drop to record low

Hedge funds raised bearish bets on U.S. natural gas to a record as warm weather threatened to crimp demand for the heating fuel this winter.

Money managers boosted net-short positions in four U.S. gas contracts by 26 percent in the week ended Sept. 29, the most in U.S. Commodity Futures Trading Commission data going back to 2010. Bullish speculators cut their long-only holdings to a record low.

Gas futures hit a three-year low this month after higher-than-average temperatures shrank demand for the power-plant fuel to the least since May. The slide in consumption is exacerbating a supply glut that’s expanding for the 10th straight year as production from shale formations such as the Marcellus and Utica floods the market, Energy Information Administration data show.

“The market doesn’t like to sell off before the winter, but we are headed toward record inventory levels, supply has not slowed down and there is consensus for a warm winter,” Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston, said by phone Friday. “Compounding that is the EIA report showing July production hit a record level.”

Gas futures climbed 0.4 percent to $2.586 per million British thermal units on the New York Mercantile Exchange in the period covered by the CFTC report. Prices have sold off since then, settling at $2.45 on Monday. The fuel for delivery in November, the first of the five-month heating season, is trading at its lowest seasonal level since 2001.

El Nino

Speculators boosted short-only wagers, bets that prices will drop, by 2.9 percent during the report period to 422,075 contracts, a 16-week high, while long positions fell 5.9 percent to an all-time low of 280,523, CFTC data show.

A weather phenomenon known as El Nino threatens to deliver an unusually mild winter, subduing gas demand.

“With a strong El Nino in play, we may be heading for a warmer than normal winter which would also certainly be bearish for nat gas going forward,” Dominick Chirichella, senior partner at the Energy Management Institute in New York, said in a note to clients Friday.

Temperatures in Chicago are forecast to reach 69 degrees Fahrenheit (20 Celsius) on Oct. 12, 5 degrees above normal, AccuWeather Inc. said. Two days later, Manhattan temperatures are projected to climb to 71 degrees, 7 above normal.

U.S. gas inventories are already 4.5 percent above the five-year average and may top a 2012 record to reach 4 trillion cubic feet, banks including Societe Generale SA and BNP Paribas SA said.

Gas deliveries to electricity generators, which account for about a third of demand for the fuel, meanwhile slumped to the least since May 31, according to LCI Energy Insight, an analysis and consulting company in El Paso, Texas. Production marketed in the lower 48 U.S. states rose in July to an all-time high in EIA monthly data, further depressing the price of the fuel, Cooper said.

“Those aren’t bullish factors,” Cooper said. “If anything, I’m surprised it’s not even lower.”

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