Threadneedle's commodity fund underweight U.S. gas

LONDON Fri May 20, 2011 12:39pm BST

LONDON (Reuters) - Expectations of a glut of natural gas and no easy way to export the surplus mean prices of the commodity in the United States are overvalued, Nicolas Robin, a fund manager at Threadneedle told Reuters.

"The view is that production is extremely strong on account of development of shale gas in the United States," Robin said.

"Even at low prices the people who have shale gas fields have an incentive to produce ... It is difficult to export any natural gas out of the United States."

U.S. gas terminals are designed primarily for gas imports, not exports.

The U.S. shale gas revolution is in its third year.

New technology has enabled companies to extract gas from previously uneconomic shale plays, triggering a boom in production that has driven down prices in the giant U.S. energy market.

The Threadneedle Enhanced Commodity Fund is underweight U.S. natural gas futures, prices of which are down about two-thirds since July 2008 to around $4.1 per million British Thermal units.

It uses the weightings of the Dow Jones-UBS Commodity Index .DJUBSTR as benchmarks for its portfolio. The fund's allocation to natural gas stood at 4.91 percent as at April 29.

Robin expects the divergence between prices of natural gas in the U.S. and prices of liquefied natural gas LNG.L in Asia to continue, partly due to strong demand from Japan, where nuclear power capacity was damaged by an earthquake in March.

"One commodity that can be used to replace nuclear power is LNG, but the LNG market is completely separate from the U.S. natural gas market. The Asian LNG market won't help U.S. gas prices," Robin said this week.

U.S. gas prices are less than half British gas prices and about one third of spot LNG prices in Asia.

BRENT VS U.S. CRUDE

The fund's allocation to crude oil overall is neutral, Robin said. It stood at 16.37 percent on April 29. However, Robin prefers Europe's Brent contract to U.S. crude West Texas Intermediate WTI.L.

"Brent is a seaborne market, the grade is increasingly in demand from Asia," Robin said. "You can't get WTI out of places like Cushing."

Malaysia's Petronas in April dropped national crude Tapis as the benchmark for its exports in favour of Brent. More Asian producers could opt to swap their benchmarks for Brent.

Some say the strategic glut in landlocked U.S. crude has caused WTI to lose its link with global fundamentals.

The disruption in Libyan exports as the country fights a civil war has clearly benefited Brent the most.

"The disruption in Libya is really affecting the European market," Robin said. "The difference between WTI and Brent is going to stay for a while."

Brent was trading around $112 a barrel on Friday and the U.S. crude at around $99 a barrel.

The civil war in Libya has shut most of its production, around 1.6 million barrels per day before unrest began. Rebel-controlled oilfields are pumping around 100,000 barrels per day, but very little is being exported.

Threadneedle's commodity fund has more than $200 million (123 million pounds) under management and in April it returned a gross 4.86 percent. (Editing by James Jukwey)

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