(Repeats with no changes. John Kemp is a Reuters market
analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/2rW5SAU
By John Kemp
LONDON, June 5 U.S. natural gas prices have
tumbled by more than 10 percent since late May as hedge funds
start to liquidate a near-record bullish position accumulated in
the expectation of a tighter market that failed to materialise.
Hedge funds and other money managers reduced their combined
net long position in the two main futures and options contracts
linked to Henry Hub prices by 584 billion cubic feet in the week
to May 30.
Fund managers reduced their net long position by the largest
amount in any one week since November 2016, after raising it by
a cumulative 1,721 bcf during the previous 12 weeks.
Prior to the selloff, hedge fund managers held a record
ratio of 5 long positions for every 1 short position, a warning
sign that their position had become overstretched and was at
risk from a reversal.
Fund managers have been more bullish on U.S. gas than any
other energy commodity in the expectation that increasing
exports plus the start up of new gas-fired power plants would
tighten gas stocks.
But the rise in gas prices over the last 15 months has
gradually rebalanced the market by incentivising more gas
production and encouraging power producers to switch back from
gas to coal at the margin.
The number of rigs drilling for gas is up by 100 from its
low in August 2016, according to oilfield services company Baker
Hughes, in response to a doubling in gas prices.
In addition, the number of rigs drilling for oil has risen
by more than 400 since May 2016, and many of these oil wells are
producing large volumes of associated gas since February 2016.
Gas output is still down compared with year ago levels but
the pace of decline has slowed and there are indications that
production is about to start rising.
At the same time, higher gas prices are rationing
consumption by electricity generators, especially owners of
combined-cycle plants that operate as baseload and consume large
volumes of fuel.
Power producers paid an average price of $3.36 per million
British thermal units for gas in March 2017 up from just $2.23
in March 2016.
Coal costs have actually fallen to just $2.08 per million
British thermal units compared with an average of $2.18 in the
same month last year.
The shift in relative prices has spurred a modest shift in
power generation away from natural gas and back towards coal.
Combined-cycle power plants ran at slightly reduced rates in
March 2017 compared with March 2016 and March 2015, according to
the U.S. Energy Information Administration.
Coal-fired power plants, on the other hand, saw a sharp
increase in capacity utilisation, running at an average of 45
percent of their full capacity, up from just 36 percent in the
same month last year.
Electricity generators produced 263 terawatt-hours (TWh) of
electricity from gas during the first quarter of 2017, down from
312 TWh in 2016.
But power production from coal increased to 292 TWh in
January-March 2017 up from 278 TWh in the same period last year.
The result is that gas stocks have remained adequate,
following the normal seasonal trend fairly closely in recent
weeks, rather than tightening as many bullish hedge fund
The concentrated bullish position was no longer consistent
with emerging indications of a more balanced market, triggering
"U.S. natural gas prices soften, market eyes big hedge fund
longs", Reuters, April 24
"Hedge funds build big bullish position in U.S. natural
gas", Reuters, April 10,
"U.S. natural gas prices rise to limit summer power burn",
Reuters, March 31
(Editing by David Evans)