Natural Gas Maintained the Top Performing ETC in Italy in December as a Cold Snap Hit the US
Thursday 16th January '14
- Large draw downs of natural gas inventory caused by US’s extreme cold weather have fuelled speculative bullish bets in US natural gas
- The narrowing of unusual wide positive spread between natural gas March and April futures indicates expectations of fading cold weather conditions being worked through into weakening prices for March futures
- Caught wrong-footed, speculators have started unwinding their long positions from elevated levels, setting in motion a long squeeze in natural gas, pressuring prices further
- Investors who share this sentiment may consider the following short commodity ETCs from Boost ETP’s product platform (www.boostetp.com/products):
Short equities:1. Boost Natural Gas 3x Short Daily ETP (3NGS)
Underpinned by extreme cold weather in the US this year, bullish positioning in natural gas looks excessive. Too much of the US’s cold season may be reflected in the inflated price of March futures, given its unusual wide positive spread over April futures. Against much lower and typically negative spreads between March and April futures observed over the same period in previous years, the recent tightening of the spread may portent to more weakness ahead as overly bullish speculative positioning by investors are caught wrong footed. Their unwinding may trigger a long squeeze, putting more pressure on natural gas.
Investors sharing this sentiment may consider the following short positions in commodities:
1. Boost Natural Gas 3x Short Daily ETP (3NGS)
2. Boost Natural Gas 2x Short Daily ETP (2NGS)
Natural gas was up 16% in January 2014 after rising 7% in December. Over the whole of 2013, natural gas rose 27%, leaving WTI Crude oil (down 7%), copper (down 7%) and gold (down 28%) as major underperformers in its wake. While the extreme cold weather affecting large parts of the US this year boosted demand for heating fuels, it caught US gas suppliers by surprise, having had to rely heavily on existing gas inventories to meet demand. Underground gas storages have depleted to such as an extent that January-end inventory levels of 1,923 Bcf (billion cubic feet) were 778 Bcf below January-end stock levels of last year, and 22% below the 5 year seasonal adjusted historic average. Although the US is seen to become energy self-sufficient and a net exporter of energy within the next decade, the sharp drop-off in inventory levels is likely to have instigated opportunistic positioning by speculators, betting on natural gas prices to rise over the short term.
A similar event that led to bullish speculative positioning helping natural gas to rally occurred in the spring of 2013, when low inventory levels and a sudden cold snap in March extended into April. With US gas inventory close to 1,600 Bcf and well below seasonal adjusted 5 year averages, natural gas prices peaked to 4.6 USD/ MMBtu by the end of April. While seasonal effects drove up the price of natural gas during that period, speculative bullish positioning did its part to feed the rally. As shown in the Chart2, speculative bullish positioning, measured as number of net long positions in combined futures and option contracts on natural gas traded on NYME and ICE exchanges, ballooned to 16% of all open futures and option contracts (speculative and non-speculative). In January speculative bullish bets have reached similar proportions, and while these have recently come down, close to 1 million options and futures contracts remain as speculatively net long positions.
After breaching 5 USD/MMBtu in January and February, natural gas has seen a sharp correction of late and is down 3.7% this month so far. Behind the correction may be the unusually wide and positive spread between natural gas’s March and April futures prices, suggesting that excessive bullishness as a result of US’s recent extreme cold weather has inflated the March futures (typically reflective of the winter season) relative to April futures (which reflect the warmer spring season). As shown in Chart 1, after peaking at 0.9 USD/MMBtu at the end of last month, the spread has only recently started to narrow but still remains unusually wide. If the narrowing spread indicates too much cold weather related bullishness being taken out of March futures for natural gas,
it may prelude to prices coming under more pressure as the cold weather naturally dissipates with spring drawing closer. With speculators likely to unwind more of their overly bullish positioning, natural gas looks prone to correct lower