Spotlight: US gas prices exposed to upside risk due to non-commercial shorts

This Spotlight from S&P Global Platts Analytics was originally published on March 10, 2020

Short-covering on the part of speculators is partly responsible for the recent rally in US Henry Hub natural gas, with investors scrambling to the sidelines as coronavirus fears rippled across financial markets.
Speculators had collectively increased their outright short futures position towards 600,000 lots earlier this quarter — lifting the non-commercial short positions to within striking distance of a five-year high.

The longstanding, unprecedented upswing in US natural gas production, along with a mild winter, was fueling bearish sentiment even before worries about the economic fallout spawned by the coronavirus.

Many bearish headwinds remain in place, especially the global gas glut, but weather-adjusted US balances have already been tightening.

Gas producers have cut spending and dropped rigs in key plays primarily responsible for the past three years of unprecedented US natural gas production growth.

With WTI crude oil prices now near $30/b, a further pullback in resource development looms, and that will crimp supply growth further looking deeper into 2020.

A reduction of associated gas production hitting the market will increase the call on higher-cost dry gas, which would also add upside pressure to prices

The nearby NYMEX natural gas futures contract sank to $1.61/MMBtu on Monday, March 9, before rebounding by around 20% since then. That low breached the five-year trough hit back in 2016. The reversal is due in part to short covering on the part of NYMEX/ICE non-commercial traders. Speculators had collectively increased their outright short futures position toward 600,000 lots earlier this quarter — lifting the non-commercial short positions to within striking distance of a five-year high — due to a slew of bearish fundamental factors.

Moreover, the outright short position has been almost twice as great as the respective outright long position over the past 15 weeks, unlike the oil complex. Beyond additional short covering, long oil/short gas bets are also likely to be pared, which will provide support to gas prices as oil traders reassess price prospects.

Source: Platts