Hedge Funds are still shorting Natural Gas according to the latest Societe Generale SA (EPA:GLE) report on their movements. That trend is slowing however and it has been slowing since at least the start of this year. The commodity is slowly recovering from the terrible outlook it has wallowed under for the last year.
According to the SG index net short positions have fallen on natural gas from -38 three weeks ago to -25 in the report published yesterday. At the beginning of the year the report puts the net short position of gas at -80. There is trend toward positivity on natural gas.
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The energy source hit its all time low in the eyes of hedge funds in February of 2011. At that time net short positions stood at -157. Gas fell to a new low in March after terrible performance in the first three months of the year.
That performance is putting huge pressure on the natural gas market as companies like Chesapeake Energy Group (NYSE:CHK) continue to struggle with the low prices I(as well as management issues). If the more positive, if still negative, outlook on natural gas from hedge funds is anything to go by there may be better days ahead for the industry.
The chart below, from the report, shows hedge fund activity in natural gas in recent months.
Gas in the United States is at a huge low because of the huge oversupply of the commodity. The introduction of hydrofracking has opened up new sources of natural gas and made them much easier to get to.
There are two positive trends that may cause the price to increase. The first is in reaction to the low price. Many of the producers of gas have closed wells due to the low pricing. The second is the export of natural gas which might be a boon to the industry in the future. Look at the chart below for the recent futures prices of natural gas:
Natural gas prices remain high all over the world except in North America. In order to correct that difference US companies are seeking to export natural gas. In order to export, however, natural gas has to be converted into liquefied natural gas.
Rex Tillerson, CEO of Exxon Mobil Corp (NYSE:XOM), said earlier this month that his firm was actively looking into building a plant to convert natural gas and export it. The process is expensive and time intensive however. The capacity to export at a reasonable rate is not there yet but any export will reduce the supply in North America even further and put upward pressure on the price.
Hedge funds are looking at these trends in the prices of natural gas and moving away from shorting it. Carl Icahn has actively moved into Chesapeake Energy Group in order to solve problems there and make the firm more valuable.
This could very well be a tipping point for the natural gas industry. It has collapsed simply because there is too much of it, but there is demand and that demand is increasing. Natural gas demand is predicted to grow by about 1.9% annually for the next ten years.
Hedge funds are rethinking their negative outlook on natural gas. Whether the industry will live up to those expectations is something of the future.