Jan. 3 (Bloomberg) -- Hedge funds cut bearish bets on natural gas for the sixth straight week on speculation that a yearlong 32 percent drop in prices will cause production cuts in 2012, allowing gas to rally from two-year lows.
The funds and other large speculators decreased net short positions, or wagers prices will fall, by 89 percent in the week ended Dec. 27, according to the Commodity Futures Trading Commission's Commitments of Traders report on Dec. 30.
Money managers have cut bearish bets by 98 percent since reaching a peak on Nov. 15, the same week U.S. inventories rose to an all-time high. Since then, futures fell below $3 for the first time since 2009 as mild weather trimmed demand and pushed a supply surplus to 13.7 above the five-year average the week ended Dec. 23, the widest since a 14 percent gap in June 2010, according to the U.S. Energy Department.
"As we get below $3, money managers are looking at the probability that it's going to drop to $2.80 or $2.70 and deciding that the chance of prices falling further is limited," said Andy Lipow, president of Lipow Oil Associates LLC in Houston.
Natural gas for February delivery rose 1.5 cents to $3.004 per million British thermal units at 12:30 p.m. after falling 1.3 percent on Dec. 30 to the lowest settlement since Sept. 11, 2009 on the New York Mercantile Exchange. Futures fell 1.6 cents to $3.112 in the week covered by the report and dropped another 4 percent through Dec. 30.
"The expectation is that drillers will stop drilling, supplies will get shut in, and we'll reach a price floor where it no longer pays to be short," Lipow said. Rising stockpiles and falling prices may encourage producers to reduce output that is forecast to reach record levels next year, he said.
Gas Rigs
The number of rigs drilling for natural gas declined by 127, or 14 percent, to 809 the week ended Dec. 30 from a 2011 peak of 936 on Oct. 14, according to data from Baker Hughes Inc. in Houston. The rig count dropped 12 percent in 2011 after rising 22 percent a year earlier.
Unless temperatures drop below normal in the U.S. this winter, supplies may end the heating-demand season in March at record levels for the time of year, Lipow said. The high is 1.695 trillion cubic feet set the week ended March 31, 2006.
Gas stockpiles slipped 81 billion cubic feet, or 2.2 percent, in the week ended Dec. 23 to 3.548 trillion cubic feet, the department reported on Dec. 29. The decrease was smaller than the five-year average decline for the week of 122 billion cubic feet, department data show. Inventories rose to a record of 3.852 trillion cubic feet the week ended Nov. 18.
Heating Demand
Heating degree days, a measure of demand for heating fuels during cold weather, are forecast to total 937 in January, close the to the 30-year average of 939.9, Matt Rogers, president of Commodity Weather Group LLC in Bethesda, Maryland, said in a Dec. 30 telephone interview. The U.S. had an estimated 767 heating degree days in December, 9.9 percent below the 30-year average of 851, Rogers said.
"There was a big deficit there," Rogers said. "Winter has been a late bloomer this year."
About 51 percent of U.S. households use gas for heating, according to the Energy Department.
U.S. gas production will rise to an all-time high next year on output from shale formations, according to Energy Department estimates. Marketed gas output will average 67.72 billion cubic feet a day in 2012, up 2.8 percent from this year, the department's Energy Information Administration said in its monthly Short-Term Energy Outlook on Dec. 6.
Prices in 2012
Rising production and reduced heating demand may continue to weigh on prices into 2012, said Phil Flynn, an analyst with PFGBest in Chicago.
"This is a classic bear market," Flynn said in a Dec. 30 telephone interview. "It can do no right. Every time we get something that looks like a bottom, the market just falls out of bed."
Hedge funds and other large speculators, including commodity pools and commodity-trading advisers, cut net-short positions in U.S. natural gas held by managed money in futures and options combined in four natural-gas contracts by 7,673 futures equivalents to 952, the least since traders were net long the week ended Oct. 4.
The measure of net positions includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swaps, Nymex Henry Hub Penultimate Swaps and ICE Henry Hub Swaps. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.
In other markets, the funds expanded bullish oil wagers on rising prices by 7.6 percent, or 13,585 contracts, to 192,446 in the seven days ended Dec. 27.
Managed money positions in gasoline advanced by 7,489 futures and options combined, or 14 percent, to 61,288, the CFTC said. Bullish bets on heating oil rose by 3,252 futures and options combined, or 20 percent, to 19,644, the data
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