Hedge Funds Snub Natural Gas Rally as Supply Gains Loom

Hedge funds are betting that the rally in U.S. natural-gas prices won’t last.

Money managers cut the combined net-long position across four benchmark contracts by 21 percent in the week ended Aug. 5, after 15 weeks of above-average stockpile increases. Bullish wagers retreated to an 18-month low even as futures traded in New York gained 2.3 percent in the report week, U.S. Commodity Futures Trading Commission data show.

Goldman Sachs Group Inc. cut its price forecast last week as shale-gas production in the eastern U.S. surged to an all-time high. Power demand in June and July fell to five-year seasonal lows amid unusually cool weather from Texas to Boston, Edison Electric Institute data show. Gas futures have dropped 12 percent since the start of summer.

“If you are a money manager and you see above-average storage injections week after week and a decline in price, selling is rational,” Tim Evans, an energy analyst at Citi Futures in New York, said by phone Aug. 8. “There’s no massive heat wave consistently across the U.S. that is going to spike air-conditioning demand, and we continue to see production numbers that show robust growth.”

Natural gas advanced 8.9 cents to $3.897 per million British thermal units on the New York Mercantile Exchange in the period covered by the CFTC report. The contract for September delivery closed at $3.962 on Aug. 8.

Stockpile Gains

Gas inventories rose by 1.567 trillion cubic feet since late March to 2.389 trillion on Aug. 1, the fastest pace of storage injections for the period in U.S. Energy Information Administration data going back to 1994. A deficit to the five-year average narrowed to 20 percent from a record 55 percent.

Power generation in the lower 48 states averaged 83,230 gigawatt-hours from June through July, the least for these months since 2009, Edison Electric data show.

“Extreme heat that would normally cause a lot of A/C demand has not materialized at all,” Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston, said by phone Aug. 7.

Goldman Sachs

Goldman Sachs reduced its outlook for the fourth quarter to $4 from $4.25, Brian Singer, a New York-based analyst with the bank, wrote in an Aug. 8 note.

Below-normal temperatures in eastern states through Aug. 17 will be followed by above-average readings along the East Coast, said MDA Weather Services in Gaithersburg, Maryland.

The EIA says record production will help boost U.S. supplies to 3.431 trillion cubic feet by the end of October as new wells come online at shale deposits such as the Marcellus in the Northeast, where daily output topped 15 billion cubic feet for the first time last month.

In other markets, net-long positions in benchmark West Texas Intermediate crude fell by 40,360 contracts, or 15 percent, to 236,381 futures and options. Longs fell 7.3 percent, while shorts surged 56 percent. WTI dropped 3.6 percent to $97.38 a barrel in the report week.

WTI futures climbed as much as $1.11 on Aug. 8 as U.S. warplanes attacked Islamic State militants in Iraq, before settling 31 cents higher at $97.65. Prices were down 6 cents to $97.59 at 6:51 p.m. yesterday in New York.

U.S. Airstrikes

Coming to the aid of Kurdish forces near Erbil, the regional capital, the U.S. used fighter jets and armed drones yesterday to destroy several armed trucks and a mortar position held by militants, the U.S. Central Command in Tampa, Florida, said in a statement. Iraq’s parliament adjourned for a week without breaking a deadlock over who should become the next prime minister.

Prices reached a nine-month high in June after the militants captured the Iraqi city of Mosul, before dropping when the rebel advance stalled, sparing the country’s south, home to more than three-quarters of its oil output.

“There’s been an upsurge in geopolitical tension but no interruption of supply so investors see no reason to jump into the market,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said in an Aug. 8 interview.

Bullish bets on gasoline dropped 1,591 contracts, or 5.2 percent, to 29,164, the lowest since February. Gasoline futures dropped 5.4 percent to $2.7155 a gallon on the New York Mercantile Exchange in the period covered by the CFTC report, the lowest settlement since Feb. 6.

Pump Prices

Regular gasoline at the pump, averaged nationwide, rose to $3.478 a gallon Aug. 9, according to Heathrow, Florida-based AAA, the largest U.S. motoring group. Prices had slipped to $3.475 Aug. 6, the lowest level since March.

Net-short positions in ultra low sulfur diesel more than doubled to 18,602 contracts, the most since June 2013. The fuel dropped 2.1 percent to $2.8469 a gallon in the report week.

Net-long positions on four U.S. natural gas contracts declined by 40,542 futures equivalents to 152,007, the lowest level since Nov. 26. Bullish wagers have dropped in 14 of the past 15 weeks.

The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.

Long positions fell 7.5 percent to 433,643, the least since Jan. 15, 2013.

“Money managers have been cutting their exposure to natural gas since February and this is just following through on that decision,” Evans said. “Prices are still below $4 and it’s not clear that the recovery we saw this week is going to be sustained.”

To contact the reporter on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net

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Novelis hikes aluminum sheet product prices in North America

Novelis has announced price hikes for automotive and specialty aluminum sheet products in North America. The revised prices will be applicable for all new orders effective immediately, Novelis added. However, all existing orders and firm agreements prior to August 7th will conform to old price.

Among automotive products, the 6000-series automotive alloys will see an increase on $0.06 per pound. The 5000-series automotive alloys prices will witness a similar jump of $0.06 per pound. Among specialty products, the prices of 1000-series and 3000-series of alloys will be hiked by $0.05 per pound. An increase of $0.03 per pound will be applied to 5000-series products. Also, 6061-O prices will be increased by $0.03 per pound. The price increase in automotive products is in addition to the pricing adjustments announced earlier in January this year.

The company also announced its commitment to the promised capacity additions and expansion in North American region. It has already commissioned two new auto finishing lines in Oswego, New York. The completion of the third line is expected soon. This is expected to lift the company’s capacity in the region to 360,000 tons per year. It also announced that the commissioning of the finishing lines in Changzhou, China and Nachterstedt, Germany would take the global capacity to 900,000 tons per year by end-2015.

Headquartered in Atlanta, Georgia, Novelis Inc. is the leading producer of rolled aluminum products. They are also the world’s largest recycler of aluminum.

Crude oil rises as Obama authorises air strikes in Iraq

Oil prices rose in Asia today after US President Barack Obama said that he has authorized air strikes against Sunni extremist militants in key crude producer Iraq.

US benchmark West Texas Intermediate crude for September delivery rose 35 cents to $97.69, while Brent crude for September delivery gained 67 cents to $106.11 in mid-morning trade.

Obama in an address yesterday said that he had ordered the air strikes to prevent “genocide” by the so-called Islamic State fighters against the besieged Yazidi minority in Iraq’s north.

“I therefore authorized targeted air strikes if necessary to help forces in Iraq as they fight to break the siege and protect the civilians trapped there,” Obama said.

He did not say whether air strikes have already been carried out.

Desmond Chua, market analyst at CMC Markets in Singapore, said the development could add “significant risk premium to oil prices” as dealers worry about potential supply disruptions.

“The announcement certainly edges up the geopolitical concerns about Iraq and the Middle East region, and comes as a bit of a surprise to investors,” Chua told AFP.

Islamic State insurgents now control large swathes of Iraq’s north and west. The sweeping offensive began on June 9, preventing Baghdad from exporting oil via a pipeline to Turkey and by road to Jordan.

Iraq’s oil ministry had on July 24 said crude exports totalled 2.42 million barrels per day in June, falling far short of a budgeted projection of 3.4 million bpd.

As the number-two producer in the OPEC cartel, Iraq’s 11 per cent of proven world reserves plays a key role in world markets and prices after violence disrupted oil exports from Syria and Libya.

The dip in exports adds to the woes of Iraq, which is heavily dependent on oil revenues, while spending more on military equipment to battle the Islamic State group.

Copper price tumbles on dismal China data, Indonesia exports

In pre-open New York trade on Wednesday September copper slid more than 1% to a low of $3.1660 a pound after data out of China showed unexpected weakness and new supply come onto the market.

Growth in China’s services sector slowed sharply in July to its lowest level in nearly nine years according toan HSBC survey of purchasing managers.

Tightness in China's domestic supply is easing, evidenced by a tumble in Shanghai premiums

Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC commented the weakness likely reflects the impact of the ongoing property slowdown in many cities and that the date "points to the need of continued policy support to offset the drag from the property correction."

The numbers are in stark contrast to the improved activity registered by the country's manufacturing sector.

The price of the red metal was also hurt by the prospect of at least 756,000 tonnes of concentrate (holding roughly 225,000 tonnes of metal) coming onto the market as Freeport McMoRan (NYSE:FCX) restarts exporting copper concentrate from Indonesia after a six-month hiatus.

Copper has been in recovery mode since hitting a near four-year low mid-March of $2.92 a pound as global stockpiles continued to decline.

Currently, copper inventories at warehouse operated by the London Metals Exchange, Shanghai Metals Exchange and on the Comex market in New York stand at roughly 275,000 tonnes, down almost by half year to date.

Growing scrutiny of China's copper financing trade may keep copper prices under pressure

But tightness in China's domestic supply are easing evidenced by a fall in premiums for copper in Shanghai warehouses to $85 a tonne, down from $105 a month ago.

China which consumes more than 40% of the world's copper imports tumbled 8% in June to 350,000 tonnes compared to the previous month.

The fall is blamed on Beijing's crackdown on the practice of using warehoused inventories as collateral for trade finance after fraudulent transactions were uncovered at the major port of Qingdao.

Reuters quotes a Commonwealth Bank of Australia research note saying the slump in imports may indicate "the growing scrutiny of China's copper financing trade may weaken China's apparent copper demand and keep copper prices under pressure."

However, year to date China is still importing refined copper at a record setting pace – up a whopping 26% over 2013 to 2.52 million tonnes.

The copper price is highly correlated with economic growth thanks to the widespread use of the metal in the construction, transport and power industries, and the robustness of the red metal is prompting industry to switch to much cheaper aluminum for some applications.

Zinc becoming investors new darling

Instability in precious and base metals prices during the past three months has pushed investors to find alternative objects of affection, with zinc quickly becoming a favourite and hitting near three-year highs, a report published Tuesday by the London Metal Exchange shows.

Prices for the metal, mainly used as a protective coating for iron and steel in construction, have jumped almost 17% since early May, hitting $2,410 a tonne late July amid worries over mine supply and falling warehouse stocks.

Experts remain bullish on the metal outlook despite a temporary pullback in prices in the last two days. Zinc fell Wednesday for a second day in London amid expanding stockpiles and speculation that a strengthening dollar will slow demand for the metal.

But bets on rising zinc prices, or long positions, accounted for 30% of total open interest as of Aug. 1, the most among the six metals traded by LME, according to its Commitments of Traders report. Money managers are net-long all of the metals, the data showed.

And according to analysts, such as Naveen Joshi, the level of underlying demand for zinc, coupled with the fact that new mine supply would not be added anytime soon could lead to the emergence of tightness in supply side over the next two years.

“Zinc has now become one of the hottest commodities in the world. The global imbalances with regards to higher demands and supply constraints would make the prices of the metal go higher not only in the short term but also long term,” he writes.

LME zinc stocks have increased 1.5%, the most since April 1, to 668,625 tons on a jump in New Orleans.