Kemp: US Natural Gas Bears Caught By Return Of Winter
(John Kemp is a Reuters market analyst. The views expressed are his own)
LONDON, Jan 23 (Reuters) - U.S. natural gas prices have bounced sharply from their lows in December after a sustained spell of exceptionally cold temperatures pushed stocks near to the bottom of their five-year range.
Futures prices for gas delivered to Henry Hub in February have risen more than 25 percent since Dec. 21. Prices for deliveries in July are up 10 percent.
The tightening calendar spread, with prompt prices rising much faster than those for deferred contracts, is consistent with a market that is undersupplied and trying to conserve remaining stocks.
Rising near-term prices should discourage gas consumption by electric generators in favour of coal while sending a signal to gas producers to increase drilling and output (http://tmsnrt.rs/2E1ZV8Q).
Gas stocks have been tightening progressively for 10 months, turning a surplus of 400 billion cubic feet (bcf) to the five-year average in March 2017 into a deficit of 200 bcf by the end of the year.
Tightening stocks were not enough to support prices, which fell steadily between May and the week before Christmas.
Hedge funds and other money managers became steadily more bearish about the outlook even as prices continued to decline.
Hedge fund managers cut a net long position in futures and options equivalent to more than 3,900 bcf in May to just 394 bcf by Dec. 19.
The ratio of hedge fund long to short positions dwindled from 5:1 in May to just over 1:1 by the middle of last month.
Short And Caught
The mild start to the winter heating season seemed to encourage increasingly aggressive hedge fund shorting of futures contracts.
Hedge fund short positions climbed from a low of 943 bcf in May to peak at 3,204 bcf in the middle of December.
The blast of cold weather at the start of January seems to have shaken the market out of this rather complacent view.
Gas stocks have fallen by 860 bcf since mid-December, including a record draw of 359 bcf in the first week of January, reflecting temperatures far below normal across the eastern and central United States.
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