Natural Gas: As Bad as It Seems?

Hedge funds are dumping natural gas.

The most recent Commitments of Traders report in the U.S. shows that bets on natgas by funds dropped 16% in the week ended September 14. Bringing the total to the lowest level this year.

Indeed, sentiment in the gas business is running low. As one analyst bluntly told me on a recent visit, "Gas is [three-letter synonym for donkey]."

Is the situation really that bleak? Price-wise, it certainly isn't pretty. Front-month NYMEX gas is sitting at $4/mcf. Even for the coming winter months, futures prices are only running $4.50.

But the fundamentals don't tell quite as depressing a story.

Gas in storage, for example. After a record gas inventory build in the U.S. last year (reaching 3.8 Tcf in October 2009), gas use in the first few months of 2010 stayed strong enough to burn through the entirety of this overhang.

This year, inventories haven't been building as fast. As of the second week of September, U.S. storage stood at 3.267 Tcf. Well below the same week last year, when stores came in at 3.458 Tcf.

What about production? There have recently been concerns that growing output from U.S. shale gas plays would swamp the market.

But here again, the numbers are not too bearish. Through the first six months of 2010, total U.S. production was 13.27 Tcf. That's higher than the same period last year, but only by 114 Bcf. Amounting to just a 0.86% increase in output.

And some sectors in America are actually using more gas these days. Power generators have switched from oil to cheaper natural gas wherever they are able. During the first half of 2010, gas use for power was up 154 Bcf, or about 5%, over the same period in 2008 and 2009. More than absorbing the increased production coming from shale gas.

None of this is to say gas is going back to $10/mcf any time soon (although you never know what a strong Gulf of Mexico hurricane might do). But even last winter amid record stockpiles and growing production, NYMEX gas managed to hit $6 in December.

Might not be as bad as the funds think?

By. Dave Forest of Notela Resources