(John Kemp is a Reuters market analyst. The views expressed are
* Chart 1: tmsnrt.rs/2cBLUlL
* Chart 2: tmsnrt.rs/2cXCfsd
By John Kemp
LONDON, Sept 19 Hedge funds have built their
largest bullish position in U.S. natural gas for more than two
years amid signs the gas glut is being eroded quickly and the
market could tighten in 2017.
Hedge funds and other money managers have amassed a net long
position in the two main futures and options contracts on NYMEX
and ICE equivalent to 2,293 billion cubic feet of gas (tmsnrt.rs/2cBLUlL).
The net long position has almost quadrupled over the last
four weeks, and is now at the highest level since June 2014,
according to an analysis of data released on Friday by the U.S.
Commodity Futures Trading Commission.
Positioning has been shifting steadily from bearish to
bullish since November 2015 but the pace of adjustmnet has
The most recent weekly increase in the net long position was
the third-largest since the start of 2010 (tmsnrt.rs/2cXCfsd).
The majority of the adjustment has come from the short side
of the market, where hedge funds with bearish short positions
betting a fall in gas prices have scaled them back.
Hedge fund short positions have declined by the equivalent
of 1,127 billion cubic feet, or 40 percent, in the last four
weeks. By contrast, long positions have risen just 544 billion
cubic feet, or 16 percent.
Hedge funds are reacting to signs the gas market is rapidly
rebalancing from oversupply in 2015 towards a potential deficit
in 2017 ("U.S. natural gas market rebalancing well underway",
Reuters, Sep 16).
Low gas prices have gradually eroded the excess supply by
causing production growth to stall and go into reverse while
encouraging record consumption by power producers.
Rebalancing has been accelerated by unusually hot weather
across the most populous parts of the United States this summer.
Temperatures and airconditioning demand have been far above
normal almost continuously since the end of May ("U.S. natural
gas market rebalances on hot weather, low prices", Reuters, Aug
Working gas stocks have risen by just 1,022 billion cubic
feet so far this injection season, compared with an average
increase of 1,594 billion cubic feet at this point during the
previous five years.
Stocks have risen by just 160 billion cubic feet in the last
four weeks compared with 309 billion cubic feet over the same
period in 2015 and a five-year average of 266 billion cubic
Winter 2016/17 is likely to be colder than the record warm
winter of 2015/16 which should increase gas consumption.
Looking to 2017, more gas-fired power plants are scheduled
to come into service, according to the U.S. Energy Information
Administration (U.S. power producers maximise gas burn at
expense of coal", Reuters, Aug 31).
Most of the new gas-fired generating capacity will be
combined cycle power plants designed for baseloading rather than
steam turbines or combustion turbines operating at peak times.
The implied increase in gas consumption will tighten the
market even further unless gas prices rise to stimulate more
drilling and stimulate some shift from gas combustion back to
coal in 2017.
Hedge funds have already anticipated and likely accelerated
the price rise by accumulating a large long position in futures
The calendar average futures price for gas delivered in 2017
has risen to $3.14 per million British thermal units from a low
of $2.14 back in December 2015.
The fundamental outlook for prices looks fairly strong at
present, but the emergence of a large hedge-fund long position
has increased the risk of a price reversal if position holders
try to take some profits.
The net long position amassed by hedge funds over recent
weeks is large by the standard of the last five years, though
below the peaks reported in 2013/14.
So, while fundamentals should continue to support higher gas
prices into 2017, liquidation risk has increased substantially
and is a negative factor for prices in the short to medium term.
(Editing by William Hardy)