(John Kemp is a Reuters market analyst. The views expressed are
* Chartbook: tmsnrt.rs/2p8JNuE
* Coal shipments: tmsnrt.rs/2pWrmMm
By John Kemp
LONDON, April 24 Hedge fund managers have
accumulated a near-record bullish position in U.S. natural gas
futures and options as gas stocks have remained at a modest
level despite an exceptionally mild winter.
Hedge funds and other money managers have boosted their net
long position in the two main futures and options contracts for
seven consecutive weeks by a total of 1,313 billion cubic feet.
By April 18, fund managers had accumulated a net position
equivalent to 3,511 billion cubic feet, the highest for three
years, according to data published by U.S. Commodity Futures
Fund managers show a strong bullish bias, with long
positions outnumbering short positions by 4.3:1, up from a
recent low of 2.2:1, and the highest ratio since February 2014.
Funds have reacted to signs of tightness in the gas market
as a result of sluggish production, strong exports and a
structural increase in gas demand from new combined-cycle power
Working gas stocks have finished the winter around 380
billion cubic feet, or 15 percent, below the same point last
year even though temperatures have been slightly warmer.
But the concentration of long positions has increased the
risk of a sharp correction if funds try to take profits
following the recent increase in prices.
The correction may already be underway with both flat prices
and the calendar spreads under pressure in recent sessions.
Futures prices for gas delivered to Henry Hub in June 2017
have fallen from a recent high of $3.33 per million British
thermal units on April 7 to $3.19 on April 21.
And the calendar spread between June 2017 and June 2018 has
dropped from 53 cents on April 6 to just 27 cents on April 21.
The sustained increase in gas prices is likely to cause
power producers to run their gas-fired units for fewer hours
this summer and increase the utilisation of coal plants.
Higher U.S. gas prices have already made it more
economically attractive to run coal-fired units despite their
lower efficiency and flexibility.
U.S. coal shipments by rail have risen by 18 percent so far
this year compared with the same period in 2016, according to
the Association of American Railroads (tmsnrt.rs/2pWrmMm).
Coal production has likely increased by a similar
percentage, according to the U.S. Energy Information
Some of the increase in shipments reflects the clearing of
excess stocks at power plants that built up between 2014 and
However, some of the increase likely reflects plans to run
coal-fired units for more hours during the summer of 2017 to
meet air-conditioning demand.
Power producers have been gradually shifting from gas to
coal burning since October 2016 as a result of higher gas
Gas prices may need to rise even further to ration
consumption by power producers if gas drilling and output fail
to pick up and exports remain high.
But prices could also struggle if coal continues to make
inroads into power-market share and summer air-conditioning
demand falls significantly short of 2016 levels.
(Editing by Susan Thomas)