Abnormally warm start to the heating season has forced traders to reassess the probabilities
By John Kemp
LONDON (Reuters) – Hedge funds have tempered their earlier bullishness towards US natural gas and heating oil as unusually warm weather has persisted nearer to the heart of the winter heating season.
Hedge funds and other money managers slashed their net long position in the US natural gas futures and options by 1,241 billion cubic feet or 45 percent over just three weeks to Nov. 8.
Hedge funds have also reduced their net long position in heating oil futures by 10 million barrels or 55 per cent in the seven days to Nov. 8, according to an analysis of data published by regulators.
Unusually warm weather across most of the continental United States that started at the end of May has stretched well into November, cutting early heating season fuel consumption.
US heating demand has been at or below the long-term average every day since the start of the heating season on July 1.
Cumulative heating demand so far has been 25 per cent below the level in 2015/16, which was the warmest winter on record.
Cumulative demand is also 42 per cent below the long-term average, according to the US National Oceanic and Atmospheric Administration (chart).
Hedge funds and many other traders were initially prepared to look past the warm start to the heating season because so much of total heating demand is normally concentrated in the core winter period stretching from Dec. through Feb. (chart).
But as the warmer-than-normal weather has persisted well into Nov. the risks of another very warm winter have been revised higher.
Most hedge funds seem to have predicted the winter of 2016/17 would be significantly cooler than the record warm winter of 2015/16 based on a degree of mean-reversion (chart).
That forecast was reasonable and may well turn out to be correct, but the run of above normal temperatures well into November has reduced confidence in that outlook.
Much colder weather is on the way for the east coast of the United States, according to the latest forecasts from NOAA.
Temperatures across the eastern population centres will be below normal from around Nov. 20 onwards which should produce much higher heating demand.
The build up of short positions in both US gas and heating oil derivatives has left both vulnerable to a short-covering rally if the weather looks like turning persistently colder.
For now, however, the abnormally warm start to the heating season has forced traders to reassess the probability that the forthcoming winter will be much cooler than 2015/16 and with it their bullish bets on fuel prices.