Natural Gas: Mixed Variables Hold Market Back, Even as Funds Cut Shorts

An interesting dichotomy is developing on the US natural gas market: Fund managers have been consistently cutting their net short position over the past month and a half, even as tumbling prices would make one think that more bears are entering the game.

The Commitments of Traders report, released on Fridays by the Commodity Futures Trading Commission, or CFTC, showed speculators again decreased last week their net bearish position in futures and options of natural gas traded on the New York Mercantile Exchange’s Henry Hub. 

That marked the sixth drop in seven weeks for net shorts, which is a bet on lower prices, even as the most-active gas contract on the Hub had sought 2½-year lows since the year began. 

In fact, net shorts held by fund managers are now at their lowest since the end of March. And indications are there could be more cuts — if gas bulls are to climb out of the hole they’ve dug themselves in since the third quarter of last year, that is.

The debate on when the bearish tide would irrevocably turn for ‘natty’ — as the all-season fuel for heating and cooling is known — has raged since gas prices began their headlong fall from 14-year highs of $10 per mmBtu, or million metric British thermal units, in August.

At brief intervals this year, the market had appeared to be on a cusp of a serious rebound — like in late February when it got above $3 after breaking below $2 earlier that month for the first time since September 2020.

This week, again, such a phenomenon appeared when the front-month May gas contract rallied three days non-stop between the close of Thursday and Tuesday, gaining a net 16% on forecasts for extended wintry-like weather through April and early May. 

The market’s first reach in more than three weeks to almost $2.40 had gotten an entire constituency of gas traders and analysts excited over the prospects of imminent $3 pricing or beyond.

By Wednesday, though, nearly half of the gains on the May contract had evaporated as traders literally got wind of changes in the air.

As Houston-based energy markets advisory, Gelber & Associates, put it:

“Mother Nature got another bluff through … with the Northeast and Southeast regions revising forecasts with less cold.”

U.S. Temperature Outlook

Source: Gelber & Associates

Chart-wise, the front-month May gas contract on the Henry Hub could stay above $2 so long as it held the $2.15 support, Sunil Kumar Dixit, chief technical strategist at SKCharting.com. In Thursday’s pre-open in New York, May gas got down $2.17 before rebounding to above $2.20.

“Some pull back from $2.38 is being witnessed while the Daily Middle Bollinger Band of $2.15 remains supportive,” said Dixit.

"Consolidation above this zone will eventually extend the up move towards the 50-day Exponential Moving Average of $2.52. A break below $2.15 opens the way for retesting $2.04 support.”

In a note issued Wednesday, Gelber reminded its clients in natural gas that the three-day rally wasn’t just a result of weather but also “seasonal buying typical during shoulder months, extremely strong LNG exports, maintenance, and other dips in domestic production”.

There are bullish elements elsewhere too, trade journal naturalgasintel.com said in a report citing EBW Analytics Group. According to that narrative:

“Feed gas demand for US liquefied natural gas terminals along the Gulf Coast has boomed to record heights. In addition, local supply has narrowed with Permian Basin maintenance restricting supplies flowing eastward, while particularly low spot prices dipping below $2 has enabled expanding power sector coal-to-gas switching across the South Central and Southeast. At the same time, the April weather outlook has flipped from vying for record warmth toward a colder-than-normal outlook for the last third of the month.”

Eli Rubin, senior energy analyst at EBW, adds:

“These shifts have collectively eased concerns of a regional glut this spring – as reflected in the narrowing discount for the NYMEX May contract versus the July contract,” Rubin said. “After more than quadrupling from below 13 cents in early fall to a peak of 54.2 cents on March 29, the spread has crashed 19.3 cents (36%) in the past three weeks as more supportive conditions became clear.”

Offsetting these somewhat are first quarter financials from US natural gas midstream players that allow market participants a glimpse into oil production, where additional volumes of associated gas usually come in — putting more pressure on already weak gas futures.

Amid these, stockpiles of gas are also building as injection season gets fully underway and production stays reasonably high, though not at peaks.

Benign East and Midwest weather in the United States limited heating demand during the week ended April 7, leading to an outsized build of 25 billion cubic feet versus the historical norms.

US utilities likely added a bigger-than-normal 69 bcf of gas to storage in the latest week to April 14 as mild weather kept heating demand lower than usual, a Reuters poll showed on Wednesday. Some are putting a higher number; Gelber, for instance, is forecasting a 74 bcf build.

That compares with a 47 bcf injection during the same week a year ago and a five-year (2018-2022) average increase of 41 bcf.

The five-year average, especially, adds the “perspective of how strong production truly is, in comparison with seasonal demand”, Gelber said in its note. 

The forecast for the week ended April 14 would lift stockpiles to 1.924 trillion cubic feet (tcf), 33% above the same week a year ago and about 20% above the five-year average.

There were around 44 heating degree days, or HDDs, last week compared with a 30-year normal of 79 HDDs for the period, according to Reuters-associated data provider Refinitiv.

HDDs measure the number of degrees a day's average temperature is below 65 degrees Fahrenheit (18 degrees Celsius) to estimate demand to heat homes and businesses.

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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.