By Christine Buurma and Sergio Chapa on 11/20/2020
(Bloomberg) –Winter hasn’t begun yet, but the bullish trade in U.S. natural gas is already starting to fall apart.
Gas futures tumbled Thursday as U.S. forecasts shifted warmer through early December, leaving bullish traders flat-footed after the previous day’s modest gain stoked speculation that the recent rout had run out of steam. Government data showed an unusually big gain in stockpiles for this time of year, adding to a glut of the fuel in underground storage.
Traders had been betting big on higher gas prices this winter, with hedge funds’ bullish wagers climbing to the highest in more than six years last month. Shale producers have curbed output on lower oil prices, while gas exports to Mexico and overseas buyers soared to a record. But with frigid weather failing to show up in the forecasts, cracks are emerging in the bullish thesis.
One sign of growing bearishness is the March-April gas spread, known as the widowmaker for its volatility. The premium for March prices versus April has narrowed to a record low for the 2021 contracts, suggesting that traders are increasingly skeptical about the prospect of tight supplies this winter.
Traders were caught in a “bull trap” overnight, with futures rising in the very early hours of the U.S. trading day before plunging as the milder forecasts emerged, said John Kilduff, founding partner at Again Capital, a New York-based hedge fund.
“We really needed the weather,” Kilduff said. “All the other supporting elements were there: LNG, exports to Mexico. The kindling was all there. But the weather was the missing element.”
But with winter still ahead, it’s too early for bulls to throw in the towel completely. Record exports and muted production are leaving prices primed to rocket higher at the first sign of extreme cold.
“The market remains under-supplied and higher prices will be a concern when weather takes a more bullish turn,” Daniel Myers, an analyst at energy research firm Gelber & Associates in Houston, wrote Thursday in a note to clients.
Gas for December delivery slid 12 cents, or 4.4%, to $2.592 per million British thermal units on the New York Mercantile Exchange, the lowest in six weeks. Prices also slipped below their 50-day moving average. The March-April spread widened to 7.5 cents after earlier narrowing to a record low of 4.8 cents.
Gas inventories rose by 31 billion cubic feet last week, exceeding median expectations for a gain of 20 bcf in a survey of analysts compiled by Bloomberg. Inventories now stand at 3.958 trillion cubic feet, approaching record levels of more than 4 trillion cubic feet set in 2016.
While gas production is still down from a year ago, output has started to recover in the past few weeks from pandemic-driven declines. Production from the Lower 48 reached 92.7 billion cubic feet on Wednesday, up 11% from a trough in October.