(Bloomberg) — Hedge funds are betting that the rally in U.S. natural-gas prices wont last.
Money managers cut the combined net-long position across four benchmark contracts by 21 percent in the week ended Aug. 5, after 15 weeks of above-average stockpile increases. Bullish wagers retreated to an 18-month low even as futures traded in New York gained 2.3 percent in the report week, U.S. Commodity Futures Trading Commission data show.
Goldman Sachs Group Inc. cut its price forecast last week as shale-gas production in the eastern U.S. surged to an all- time high. Power demand in June and July fell to five-year seasonal lows amid unusually cool weather from Texas to Boston, Edison Electric Institute data show. Gas futures have dropped 12 percent since the start of summer.
If you are a money manager and you see above-average storage injections week after week and a decline in price, selling is rational, Tim Evans, an energy analyst at Citi Futures in New York, said by phone Aug. 8. Theres no massive heat wave consistently across the U.S. that is going to spike air-conditioning demand, and we continue to see production numbers that show robust growth.
Natural gas advanced 8.9 cents to $3.897 per million British thermal units on the New York Mercantile Exchange in the period covered by the CFTC report. The contract for September delivery closed at $3.962 on Aug. 8. Prices were up 0.8 percent at $3.995 at 9:24 a.m. today.
Stockpile Gains
Gas inventories rose by 1.567 trillion cubic feet since late March to 2.389 trillion on Aug. 1, the fastest pace of storage injections for the period in U.S. Energy Information Administration data going back to 1994. A deficit to the five- year average narrowed to 20 percent from a record 55 percent.
Power generation in the lower 48 states averaged 83,230 gigawatt-hours from June through July, the least for these months since 2009, Edison Electric data show.
Extreme heat that would normally cause a lot of A/C demand has not materialized at all, Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston, said by phone Aug. 7.
Goldman Sachs
Goldman Sachs reduced its outlook for the fourth quarter to $4 from $4.25, Brian Singer, a New York-based analyst with the bank, wrote in an Aug. 8 note.
Below-normal temperatures in eastern states through Aug. 17 will be followed by above-average readings along the East Coast, said MDA Weather Services in Gaithersburg, Maryland.
The EIA says record production will help boost U.S. supplies to 3.431 trillion cubic feet by the end of October as new wells come online at shale deposits such as the Marcellus in the Northeast, where daily output topped 15 billion cubic feet for the first time last month.
In other markets, net-long positions in benchmark West Texas Intermediate crude fell by 40,360 contracts, or 15 percent, to 236,381 futures and options. Longs fell 7.3 percent, while shorts surged 56 percent. WTI dropped 3.6 percent to $97.38 a barrel in the report week.
WTI futures climbed as much as $1.11 on Aug. 8 as U.S. warplanes attacked Islamic State militants in Iraq, before settling 31 cents higher at $97.65. Prices were up 21 cents to $97.86 at 9:25 a.m. today in New York.
U.S. Airstrikes
Coming to the aid of Kurdish forces near Erbil, the regional capital, the U.S. used fighter jets and armed drones yesterday to destroy several armed trucks and a mortar position held by militants, the U.S. Central Command in Tampa, Florida, said in a statement. Iraqs parliament adjourned for a week without breaking a deadlock over who should become the next prime minister.
Prices reached a nine-month high in June after the militants captured the Iraqi city of Mosul, before dropping when the rebel advance stalled, sparing the countrys south, home to more than three-quarters of its oil output.
Theres been an upsurge in geopolitical tension but no interruption of supply so investors see no reason to jump into the market, John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said in an Aug. 8 interview.
Bullish bets on gasoline dropped 1,591 contracts, or 5.2 percent, to 29,164, the lowest since February. Gasoline futures dropped 5.4 percent to $2.7155 a gallon on the New York Mercantile Exchange in the period covered by the CFTC report, the lowest settlement since Feb. 6.
Pump Prices
Regular gasoline at the pump, averaged nationwide, rose to $3.478 a gallon Aug. 9, according to Heathrow, Florida-based AAA, the largest U.S. motoring group. Prices had slipped to $3.475 Aug. 6, the lowest level since March.
Net-short positions in ultra low sulfur diesel more than doubled to 18,602 contracts, the most since June 2013. The fuel dropped 2.1 percent to $2.8469 a gallon in the report week.
Net-long positions on four U.S. natural gas contracts declined by 40,542 futures equivalents to 152,007, the lowest level since Nov. 26. Bullish wagers have dropped in 14 of the past 15 weeks.
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. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.
Long positions fell 7.5 percent to 433,643, the least since Jan. 15, 2013.
Money managers have been cutting their exposure to natural gas since February and this is just following through on that decision, Evans said. Prices are still below $4 and its not clear that the recovery we saw this week is going to be sustained.
–With assistance from Terry Atlas and David Lerman in Washington.
