Smart money traders liquidated short positions as natural gas prices corrected to the downside in the week ended Dec. 20, but the activity may do little to change the market's overall upside direction.
The latest "Commitments of Traders" report published by the CFTC on Dec. 23 revealed that short covering took place in both crude oil and natural gas, with the noncommercial category of natural gas traders reaching a net long position for the first time since the week ended Feb. 27, 2007.
The net long position held by noncommercial traders in natural gas reached 120 contracts in the week ended Dec. 20, according to the CFTC. The position compared to a net short of 14,460 contracts in the previous week.
The breakdown of trades showed that short covering was mostly at work, as 11,382 long positions were cut while shorts fell by 25,962 contracts. Prices fell 21.1 cents during the survey period.
The move to a net long position came in advance of a return of colder weather that boosted trade in the last few days of the week ended Dec. 23.
"The late-week strength was based on the weather forecast suggesting a return to below-normal temperatures at the end of the forecast even as current temperatures are extremely bearish," analyst Kyle Cooper with IAF Advisors said. "If the colder-than-normal temperatures actualize, prices could easily continue higher."
Indications of short covering were similar in the managed money category, as the net long position grew by 6,212 contracts to reach 163,719 in the week ended Dec. 20. There were 14,484 long positions cut, while shorts fell by a larger 20,696 contracts.
The change in the positions of smart money traders could indicate that prices will continue moving higher in coming weeks. Since the managed money category formed a record net short in the week ended Nov. 3, 2015, at 233,984 contracts, natural gas prices have advanced $1.01/MMBtu through the week ended Dec. 20 from $2.253/MMBtu.
Noncommercial traders include those large enough to meet minimum position thresholds but not involved in hedging, while the managed money category includes those who engage in futures trades on behalf of investment funds or clients. Both are widely followed by traders and are considered to be the "smart money," as their positioning can track or sometimes lead changes in price trends.
In crude oil, the noncommercial category added 13,894 to its net long position to reach 436,661 contracts. The change was made through the liquidation of 11,076 long positions while shorts fell by 24,970. Prices declined 75 cents during the survey week.
Managed money traders exhibited a similar bias, with their net long growing by 8,996 to reach 283,753 contracts in the week ended Dec. 20. It was the highest net long since the week ended July 8, 2014.
The breakdown of trades showed that 9,618 long positions were cut while shorts were reduced by 18,614 contracts.
Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power and natural gas index prices, as well as forwards and futures, visit our Commodities Pages.