Bulls Fleeing Natural Gas as Goldman Sees Further Drop: Energy

Jul 28, 2014 3:22 pm ET

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July 28 (Bloomberg) -- Speculators are fleeing natural gas after prices dropped below $4 for the first time since December and power plant production fell to a 13-year seasonal low.

Hedge funds reduced net-long positions, or bets on rising prices, by 11 percent in the week ended July 22, the U.S. Commodity Futures Trading Commission said. Bullish wagers have declined 51 percent since February.

Futures slid as the output from electricity generators, the biggest consumers of the fuel, fell 11 percent in the week ended July 19 from a year earlier to the least for the period since 2001, according to the Edison Electric Institute. Mild weather and a record pace of inventory gains may push prices lower in the next three months, Goldman Sachs Group Inc. said.

“The move down in prices this early in the summer is surprising,” Breanne Dougherty, a natural gas analyst at Societe General SA in New York, said in a phone interview on July 25. “The power generation load makes and breaks summers and it’s extremely sensitive to weather.”

Natural gas dropped 7.9 percent to $3.772 per million British thermal units on the New York Mercantile Exchange in the period covered by the CFTC report. The contract for August delivery closed at $3.781 on July 25, capping a sixth weekly decline, the longest stretch of losses since the first quarter of 2010. It fell to an eight-month low of $3.747 today.

Gas Supply

Gas inventories, which declined to an 11-year low in late March, have rebounded at the fastest pace since 2001, U.S. Energy Information Administration data show.

Stockpiles rose by 90 billion cubic feet to 2.219 trillion in the week ended July 18, a gain bigger than the five-year average for the 14th straight week, according to the EIA.

“While we previously believed that risks to 2014 prices were skewed to the upside, we now see downside risks to U.S. gas prices in the next three months,” Daniel Quigley, a Goldman analyst in London, said in a note on July 22.

Power generation in the lower 48 states totaled 82,614 gigawatt-hours in the seven days ended July 19, the least since the week ended June 13, Edison Electric data show.

This month has been the coolest July since 2009, Matt Rogers, the president of Commodity Weather Group LLC in Bethesda, Maryland, said in an e-mail on July 25. “We’re expecting the cool pattern to continue into August.”

Power Plants

Gas deliveries to power plants dropped 13 percent this month to average 25.9 billion cubic feet a day as of July 25, the lowest for the period since 2009, according to LCI Energy Insight in El Paso, Texas.

Futures may find support between $3.50 and $3.75 for the rest of the stockpiling season, with those prices prompting power plants to switch from coal, Teri Viswanath, the director of commodities strategy at BNP Paribas SA in New York, said by phone on July 24.

“The problem with the emergence of this cool fall-like weather is that we don’t expect to see a slowdown in those inventory injections until the reemergence of heating demand,” she said.

In other markets, the downing of a civilian airplane in Ukraine and crude stockpiles at Cushing, Oklahoma, at a six-year low enticed speculators back to the oil market, boosting bullish bets from a six-month low.

Money managers raised net-long positions in benchmark West Texas Intermediate futures by 7.3 percent to 278,116 futures and options combined in the week ended July 22, CFTC data show. Long positions rose 1.1 percent 307,739 while shorts dropped 35 percent to 29,623.

WTI Jump

WTI futures advanced 4.5 percent to $104.42 a barrel on the Nymex in the period covered by the report. The contract closed at $102.09 on July 25.

Net long gasoline bets fell 22 percent to 34,115. Futures slipped 0.6 percent to $2.8807 a gallon on the Nymex in the week covered by the report and settled at $2.8653 on July 25.

Gasoline at U.S. pumps, averaged nationwide, slid 0.7 cent to $3.543 a gallon on July 24, the lowest since March 28, according to data from Heathrow, Florida-based AAA, the nation’s largest motoring group. Retail prices are down 4.1 percent from a 13-month high on April 26.

Money managers’ bets on ultra-low sulfur diesel flipped to a net short position for the first time since November with 1,520 contracts, the CFTC report showed. Futures fell 0.1 percent to $2.8542 a gallon in the report week and closed at $2.9157 on July 25.

Natural Gas

Net-long positions on four U.S. natural gas contracts declined by 25,772 futures equivalents to 201,090, the least since Dec. 3.

The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.

Long positions fell by 4 percent to 472,613, the least since February 2013. Bearish bets gained 2.3 percent to 271,523, the most since Dec. 10.

“I wouldn’t expect prices to go much lower,” said Societe Generale’s Dougherty. “That said, if we continue to get extremely mild weather as we saw in July through October, we will see a slightly different story.”

--With assistance from Moming Zhou in New York.