Natural Gas Futures/Options: Net Positions at Unprecedented Levels

If differences of opinion make a market, then there is definitely a market in natural gas. Each week (on Friday), the U.S. Commodity Futures Trading Commission publishes a report detailing the market position of futures traders. The report, called the Commitments of Traders [COT] Report, lists positions for both “commercial” and “non-commercial” traders. Commercial traders are those who are engaged in business activities hedged by the use of the futures or options market. Non-commercial traders are large speculators. There is also a category for non-reportable positions made up of smaller traders or speculators who can be either commercial or non-commercial.

The two charts below show that, as of the 7 March 08 COT report (detailing positions as of 4 March), the non-commercial traders of natural gas futures and options were net short and the commercial traders were net long. Despite a slight pullback in position, these two groups were still near the record levels established in the previous report. Commercial natural gas traders tend to be net short, except for the period from late fall to early spring. However, these traders went net long in early 2007 and their position has been trending upward since then. The converse is true for the non-commercial traders who went net short in early 2007. Again, these positions are now just off unprecedented extremes.

Commercial traders, who normally increase their net short position into price increases such as those seen recently, seem to believe the price of natural gas will go higher still. Large speculators are taking the other side of the market, betting that prices will retreat. Given the extremes in their positions, natural gas seems poised to move significantly one way or the other.

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Disclosure: The author is long natural gas stocks and options.