Hedge funds turned bearish on U.S. natural gas for the first time in eight weeks as a surplus and warmer-than-normal weather pushed the price of the heating fuel to the lowest level in more than two years.
The funds and other large speculators switched from bets that futures will rise to a bearish, or “short,” position of a net 10,344 futures equivalents in the week ended Jan. 10, according to the Commodity Futures Trading Commission's Commitments of Traders report on Jan. 13.
Natural gas plunged 13 percent last week on the New York Mercantile Exchange, the biggest decline since August 2009, after forecasts showed above-average temperatures through January. Stockpiles in the week ended Jan. 6 stood at 3.377 trillion cubic feet, 17 percent above the five-year average, the U.S. Energy Department reported on Jan. 12.
“The funds that got short are feeling good right now,” Kyle Cooper, director of research for IAF Advisors in Houston, said in a telephone interview on Jan. 13. “As long as it stays this warm, prices have to go lower. With this type of weather, the storage surplus becomes catastrophic.”
Natural gas for February delivery fell 5.2 cents to $2.941 per million British thermal units on the Nymex in the week covered by the report and dropped another 9.2 percent to $2.67 on Jan. 13, the lowest settlement price since Sept. 3, 2009.
The contract fell for sixth day today, dropping 12.2 cents, or 4.6 percent, to $2.548 at 10:59 a.m. in New York.
Storage slipped 95 billion cubic feet in the week ended Jan. 6, compared with a five-year average decline of 128 billion, the Energy Department reported. Inventories rose to an all-time high of 3.852 trillion cubic feet on Nov. 18.
Supplies may reach a seasonal record of 2.4 trillion cubic feet in March, which is when heating demand usually ends and producers begin piping more gas into storage, Cooper said. Unless production falls or cold weather bolsters demand, prices will drop to $2.40 per million Btu, and perhaps below $2, as gas overflows storage caverns and clogs pipelines, he said.
“This is a situation that has never been seen before,” Cooper said. “If we hit 2.4 trillion, you're looking at storage capacity constraints by July or August where you literally have system problems because the system is so full.”
U.S. gas production will rise to an all-time high next year amid rising output from shale formations, according to Energy Department estimates. Marketed gas output will average 67.34 billion cubic feet a day in 2012, up 2.2 percent from this year, the department's Energy Information Administration said in its Jan. 10 Short-Term Energy Outlook.
Forecasts have shown higher temperatures, Matt Rogers, president of Commodity Weather Group LLC in Bethesda, Maryland, said in a Jan. 13 telephone interview. His predictions for January heating degree days, a measure of demand for fuel during cold weather, fell by 115, or 12 percent, to 822 from his Dec. 30 estimate of 937.
“It's nowhere close to what we were expecting,” Rogers said. “It's making everyone question whether there will be any cold weather this winter.”
Heating demand will be 4.4 percent below normal in the U.S. through Jan. 20, and 6 percent below normal in New York, David Salmon, a meteorologist with Weather Derivatives in Belton, Missouri, said in a report to clients on Jan. 13.
About 51 percent of U.S. households use gas for heating, according to the Energy Department.
Hedge funds and other large speculators, including commodity pools and commodity-trading advisers, switched in the week ended Jan. 10 from a net-long position of 14,318 the previous week. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swaps, Nymex Henry Hub Penultimate Swaps and ICE Henry Hub Swaps. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.
In other markets, funds increased oil wagers on rising prices by 1,365 to 201,672 contracts in the seven days ended Jan. 10.
They boosted positions in gasoline to the highest in records going back to 2006. Bullish bets advanced by 3,929 futures and options combined, or 5.8 percent, to 71,282 in the week ended January 10, the CFTC said. Bets that heating oil will rise increased by 3,841 futures and options combined, or 15 percent, to 30,103, the data showed.