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Energy Market Update: October 30, 2018

By Direct Energy Business

The CME/Nymex Natural Gas Futures Market is subject to myriad factors, which can send prices up or down. Today, we’re looking at the complex relationship between two specific groups of traders and how their behavior could influence natural gas futures.

Here’s our take:

The CFTC’s Disaggregated Commitments of Traders Report

Every Friday, the Commodity Futures Trading Commission (or CFTC -- the regulatory body which oversees U.S. commodity futures exchanges) publishes a report outlining which categories of traders the CFTC has tracked in the last week. These categories include:

Producer/Merchant/Processor/User

This is an entity that predominantly engages in the production, processing, packing or handling of a physical commodity (a raw material usually sold in bulk, such as metal, grains, or natural gas). This entity uses the futures markets to manage or hedge risks associated with producing and processing commodities.

Swap Dealer

These entities deal in swaps for commodities, in which a floating (or market) price for a given commodity is traded for a fixed price over a specific period of time. They use the futures markets to manage or hedge the risk associated with those swap transactions.

Money Manager

This is a registered commodity trading advisor (CTA), a registered commodity pool operator (CPO) or an unregistered fund identified by the CFTC who trades on the futures markets on behalf of clients.

Other Reportables

For every futures exchange, the CFTC designates a limit above which traders must report their position. These traders fall into the “Other Reportables” category.

Natural Gas Futures

Today, we see a near-record net long position for the managed money category. However, we are also seeing a near-record net short position from the “other reportables” category. This means that money managers are doing much of the buying of natural gas futures, while entities belonging to the “other reportables” group are doing much of the selling.

Of course, there are other factors influencing the markets. But given that these two positions are currently the largest and appear to be balancing each other out, it’s not unreasonable to speculate that the managed money index is supporting the market while the “other reportables” category is acting as an anchor.

What does all of this tell us?

If we look at the generic natural gas spot contract (which is simply a rolling natural gas futures position), we see that it has remained, for the most part, steady this year. This could be a result of the two positions we looked at -- managed money vs. other reportables -- keeping one another in check. So, assuming our hypothesis holds true: what happens if one of these entities changes course, while the other doesn’t? Such a shift could upset this year’s status quo and send natural gas futures prices in a new direction.

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Posted: October 30, 2018

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