Bearish U.S. Gas Bets Surge in Ugliest October Since 2008

  • Hedge funds expanded net-short position in gas by 2.4%
  • Gas futures fell 8% in October, biggest monthly drop this year

Hedge funds raised bearish bets on U.S. natural gas to an all-time high just before prices capped their worst performance for the month of October since 2008.

Money managers increased their net-short position in gas contracts by 2.4 percent to 155,589 in the week ended Oct. 27, according to the U.S. Commodity Futures Trading Commission. Long-only bets declined for the fifth consecutive week.

Gas futures that have historically rallied in October ahead of the winter heating season instead slid 8 percent on forecasts for mild weather and an expanding supply glut. A U.S. government report out on Thursday will probably show stockpiles have already surpassed the November 2012 record of 3.929 trillion cubic feet, BNP Paribas SA said, citing preliminary pipeline flow data.

“It’s been a really ugly market,” Teri Viswanath, director of commodities strategy at BNP in New York, said by phone Friday. “We are charting new territory, and now we really get to see physically how much gas these storage facilities can handle.”

Gas futures slid 16 percent on the New York Mercantile Exchange in the period covered by the CFTC report. On Tuesday, they dipped below $2 for the first time in three years and came within pennies of testing the April 2012 intraday low of $1.902. Prices closed down 2.8 percent at $2.256 on Monday.

Unbelievably Low

“The market has demonstrated the ability and the desire to get down there,” Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania, said by phone Friday. “We are already at unbelievably low levels so when we get to that point is all about psychology now.”

A report by the U.S. Energy Information Administration Thursday showed gas inventories were on track to hit an all-time high by the end of this month. Storage levels increased by 63 billion cubic feet to 3.877 trillion on Oct. 23, just 52 billion shy of the record.

They probably increased by another 69 billion this week and will continue to set new records through the first two weeks of November, Tim Evans, an energy analyst at Citi Futures Perspective in New York, said in an Oct. 29 note to clients.

Meanwhile, U.S. gas production continues to rise, reaching almost 91 billion cubic feet a day in August, the EIA said in a report Friday.

Warm Weather

Temperatures will be above normal across the lower 48 states through Nov. 3 with unusually mild readings in the central and eastern states for the following 10 days, according to MDA Weather Services. About half of U.S. households use gas for heating, led by the Midwest and the Northeast.

“This market, to be blunt, cannot move significantly higher without another polar vortex because there is nothing driving it other than the weather,” Schork said. “In Philadelphia, if I’m still wearing shorts while deep frying turkey, I think we will be at $1.90 by about Thanksgiving.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE