Confidence remains low on natural gas

Hedge funds and other speculators cut their bullish bets.

The smart money thinks natural gas prices are poised for another late summer swoon. Hedge funds and other large speculators cut their bullish bets by 23 per cent in the week that ended on August 10, the US Commodity Futures Trading Commission reported. Natural gas has already declined 13 per cent this month, dropping to $4.303 per million British thermal units in early trading yesterday, and many observers see demand remaining low with consumer confidence low. It would be the second year in a row to see a sharp drop, as prices slipped 19 per cent last August.

"There's a significant amount of supply out there and the overall economy is really having trouble recovering and growing. The increase in demand for natural gas is going to be slower than people expect," said Andy Lipow, the president of Lipow Oil Associates, a consulting company in Houston. The wildcard in the mix is the possibility of hurricanes in the Gulf of Mexico, which has so far experienced a slow storm season.

The increase in short positions leaves hedge funds vulnerable to sharp moves higher in prices that would probably accompany the threat of a hurricane, said Teri Viswanath, the director of commodities research at Credit Suisse Securities USA in Houston. On August 5, the US reduced its forecast for the Atlantic hurricane season to 14 to 20 named storms, down from 14 to 23, because of less activity than expected in the first two months of the season.

The sluggish economy, combined with rising production and inventories, will continue to weigh on gas prices. And the bullish impact of any hurricane will be muted since the Gulf of Mexico accounts for 10 per cent of US gas production, down from 17 per cent in 2005. Natural gas inventories rose 37 billion cubic feet to 2.98 trillion in the week ending on August 6, the energy department reported on Thursday.

US gas stockpiles at the end of October may reach 3.752 trillion cu ft, just short of the record supplies reached last November. "The view of the market is bearish," said Tim Evans, an energy analyst at City Futures Perspective in New York. "It's a flow of selling that has weighed on prices and we've got to get through that before prices can rise." * with Bloomberg