Funds Drag Gas to 16-Year Low One Week and Rally the Next

  • Hedge funds boosted net-short position in gas by 31% last week
  • Gas futures have rallied 41 percent since reaching 16-year low

Just eleven days ago, U.S. natural gas bears were busy dragging prices to a 16-year low. Now, they’re behind the biggest year-end rally on record.

Hedge funds that raised net-short bets in gas contracts by the most in three months are now looking for cover as weather in the U.S. East takes an unexpected turn, with forecasts showing temperatures in the region dropping in early January. Prices have rallied 41 percent since Dec. 18, when they reached the lowest level since 1999.

“You had a lot of shorts coming into the market and that led to what’s been going on this week,” Stephen Schork, president of Villanova, Pennsylvania-based consultancy Schork Group Inc., said by phone Monday. Gas is “a market that lulls you to sleep. Then all of the sudden you get one change in the weather and all hell breaks loose,” he said.

A week ago, gas bears still had fundamentals and mother nature on their side. December was on track to be the worst for heating fuel demand since 1950, according to Commodity Weather Group LLC. A strong El Nino and polar jet stream kept arctic air from rushing into the U.S. East, crimping gas consumption. Booming supplies from U.S. shale formations meanwhile boosted inventories to a seasonal record.

Raising Shorts

Hedge funds raised their net-short position in gas contracts by 31 percent to 123,136 in the seven days ended Dec. 22, U.S. Commodity Futures Trading Commission data show. Their bearish bets were just in time, as gas prices sank to a 16-year intraday low of $1.684 on Dec. 18.

Futures on Tuesday reached $2.372, the highest settlement in six weeks. Temperatures will drop to seasonal lows during the first week of January following this month’s surge of warm, springlike weather, according to Commodity Weather Group.

“We can probably get another 10 to 15 cents” in price increases from gas bears covering their shorts alone, Schork said.

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