Hedge Funds Cut Stakes in Energy Market

Investors cut hedge fund bets on natural gas by 23% this week, marking the lowest level so far this year.  Last year, fuel prices fell by 19% over the course of August, and we may be in for a repeat performance according to the data from the Commodity Futures Trading Commission.  Natural gas has already fallen 14% since the start of August, with a current value of $4.228 per million Btus on the New York Mercantile Exchange.

The tanking prices can be attributed to record high fuel stockpiles and low demand from consumers who are trying to cut back on spending and transportation costs.  Andy Lipow, president at a Houston-based consulting firm, pointed out that natural gas futures fell well below $4 last year, to a decade-long low of $2.508 per million Btu.  In the struggling economy, he explains that, “the increases in demand for natural gas are going to be slower than people expect.”

Long positions in options and futures for four major natural gas contracts accounted for the 23% decrease this week.  The potential for profit from the remaining short bets is still uncertain.

Hedge funds take on vulnerability.

An increase in short position bets makes the hedge funds more susceptible to losses should hurricane storm reports suddenly bump up gas prices.  Teri Viswanath, director of the commodities research department at Credit Suisse Securities, thinks the market is “ripe for a short squeeze” as we enter the heart of hurricane season.  The U.S. Climate Prediction Center in Maryland is currently expecting somewhere between 8 and 12 hurricanes during the remainder of the season.

Disaster in the Gulf has cut production enough to mitigate the impact of hurricane season.

Hedge fund managers are counting on a muted hurricane season, which is very probably given the BP oil spill in the Gulf.  Production in that region has already been severely reduced, and the natural gas refined there accounts for 10% of the U.S. gas production.  Inventories continue to grow by nearly 40 billion cubic feet per week, meaning that stockpiles could exceed 3.7 trillion cubic feet by the end of October.  Hurricane Alex and Tropical Storm Bonnie did cut down on production, but only by 8 billion cubic feet, which was much less than the 20 billion cubic feet that government officials had expected.

Energy analyst Tim Evans says that the selling trend is what is currently driving gas prices down.  “We’ve got to get through that before prices can rise,” he says.  Nymex gas futures are accepted as a general benchmark for the natural gas prices.  Nymex hold four major gas contracts including natural gas futures, Henry Hub Swaps, Henry Hub Penultimate Swaps, and ICE Henry Hub Swaps.