Hedge Funds Seen by Citigroup Buying Gas as Mid-$3 Forecast

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  • Speculators’ positions could flip to net long by year end
  • Inventories up 33% this summer compared with 75% in 2011-2015

Citigroup Inc. expects hedge funds to bet on rising natural gas by the end of the year as strong demand and slowing production help push prices toward the mid-$3 range in 2017.

Money managers will probably hold more long positions than short by the end of the year, unless the winter is mild, Citigroup analysts including Anthony Yuen said in an Aug. 3 note. Speculators have reduced their net short positions in natural gas on the New York Mercantile Exchange from a seven-year high of 228,000 futures and options in November 2015 to about 43,000 as of last week, according to Commodity Futures Trading Commission data.

“The apparent reduction in net short this summer likely reflected weather and expected fundamental tightness anticipated next year,” Yuen wrote in the report. “Given that the managed money segment is still in a net short position, even a modest unexpected bump in winter heating demand could offer support to prices as speculators liquidate more short positions.”

Speculator activity could help lift prices to an average of $3.40 to $3.60 per million British thermal units next year, Yuen wrote. The current average of all monthly futures contracts next year is about $3.18, according to Bloomberg Fair Value data. Front-month futures on Nymex fell 0.1 percent to $2.835 at 6:33 a.m. in New York.

Slowing Stockpiles

Falling production in the U.S. and increased demand from electricity generators powering air conditioners during the country’s hottest summer on record have slowed inventory growth this summer. Stockpiles have risen 33 percent from the end of March to the end of July, compared with an average increase of about 75 percent over the same period from 2011 to 2015.

If prices rise, natural gas drillers might sell short positions to lock in profits from future production. That will likely be balanced by gas consumers and exporters buying long positions to hedge future costs, Yuen said.

“This see-saw between producer hedging and user/exporter hedging could keep the back of the forward curve relatively range-bound but highly volatile, potentially within the $3 per million Btu range,” Yuen wrote.