Henry Hub futures made a U-turn in the last three weeks, giving back all the gains - and then much more - after an impressive rally in September and early October. At the front end of the curve, futures prices have dropped by over $0.75/MMBtu from the recent peak.
The decline in prices coincided with position liquidation in financial Henry Hub futures by large commodity pools and hedge funds. In the three weeks ending November 8, Money Manager traders reduced their aggregate length by ~$1.3 Tcf, or more than one-third. While rapid position changes by this trader category are not uncommon, this is the largest one since the beginning of 2014.
Whether a swift position reduction in financial futures by a certain category of traders can explain big price moves in the underlying commodity is subject to debate. Still, many analysts closely track changes in the aggregate trading position held by large commodity Money Managers. This category includes a broad range of entities, such as commodity trading advisers, managed commodity pools and hedge funds.
Traders in this category (and their clients) often make directional bets using financial futures and options. A case can be made, therefore, that changes in the aggregate position held by Money Managers can be thought of as an indicator of commodity investor sentiment (albeit, one might argue, a lagging one).
The following article reviews changes in natural gas traders' positions from the previous week and provides a visual summary of position changes by trader category over time (trader categories are explained in APPENDIX).
Money Managers Reduce Net Length
For the week ending November 8, the CFTC reported another reduction in the Money Managers' aggregate position in Henry Hub financial futures, bringing the decline to nearly 1.3 Tcf in just three weeks. The position liquidation coincided with a big move down in Henry Hub financial futures prices during the same period.
The following three charts show aggregate position changes across the other three reported large-trader categories.
Combining Futures & Options Data
Trading in commodity futures is closely intertwined with trading in options on the same instruments.
In addition to reporting traders' positions in commodity futures, exchanges calculate traders' combined futures-plus-options positions using delta factors. Long-call and short-put open interest are converted to long futures-equivalent open interest. Likewise, short-call and long-put open interest are converted to short futures-equivalent open interest. A trader's long and short futures-equivalent positions are added to the trader's long and short futures positions to give "combined-long" and "combined-short" positions.
The following charts summarize changes in traders' combined Futures & Options Positions in Henry Hub financial futures (calculated on a futures-equivalent basis).
Adding options does not change the trends observed in the Futures-Only data. The overall conclusion is essentially the same.
APPENDIX: Commodity Trader Categories
CFTC collects data on large-traders' positions in commodity futures and options on a daily basis from clearing members, futures commission merchants, and foreign brokers. The aggregate of all traders' positions reported to the CFTC usually represents 70% to 90% of the total open interest in any given market. Select data are made public on a weekly basis.
The four categories of commodity traders discussed in the article above are:
- Money Managers. A "money manager" is a trader engaged in managing and conducting organized futures trading on behalf of clients. This category includes registered commodity trading advisors (CTA); registered commodity pool operators (CPO); or unregistered funds ("hedge funds").
- Producers/Merchants/Processors/Users. A "producer/merchant/processor/user" is an entity that predominantly engages in the production, processing, packing or handling of a physical commodity and uses the futures markets to manage or hedge risks associated with those activities.
- Swap Dealers. A "swap dealer" is an entity that deals primarily in swaps for a commodity and uses the futures markets to manage or hedge the risk associated with those swaps transactions. The swap dealer's counterparties may be speculative traders, like hedge funds, or traditional commercial clients that are managing risk arising from their dealings in the physical commodity.
- Other Reportables. Every other reportable trader that is not placed into one of the other three categories is placed into the "other reportables" category.
The CFTC reviews information provided by large traders to determine the category in each specific case.
Please note that the aggregate of all long open interest is equal to the aggregate of all short open interest.
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