Shorts Crushed As Nat Gas Explodes Higher After Tripping Stops

While the investing community has been focused on crude oil for the past two weeks, and for obvious reasons as the black gold suffered a historic and record rout of 12 consecutive days of declines, sending it into a bear market from multi-year highs just a few weeks ago, a just as notable - if inverse - development has been taking place in natural-gas, whose prices have been soaring.

On Tuesday, a sudden change in weather forecasts pushed natural-gas futures to $4.10 per MMBTU, the highest level since November 2014. The rapid surge has rattled investors and traders, as the market goes into the winter heating season with less supplies in storage than any other year since 2005. Natural-gas prices have climbed 39% this year, and last week they entered a bull market, just as oil slumped into a bear.

Traders had expected record-high levels of natural-gas production would replenish stores for winter. However, as the WSJ notes, demand has climbed outside of weather-related catalysts, going toward rising exports and as a substitute for other energy sources like coal. “There’s a more structural base to the demand equation than others think,” said Kyle Cooper, a consultant at ION Energy Group in Houston.

Last winter, a severe storm drove natural-gas futures above $3/mmBtu. The Northeast, which lacks the pipelines needed to move natural gas, experienced even sharper price swings, with regional prices surging as high as $175/mmBtu. “The cold to this extent was not really on anyone’s radar. Now forecasters are scrambling,” said Jacob Meisel, chief weather analyst at Bespoke Weather Services.

Meanwhile, as prices rose, some suggested that one or more funds were caught short nat gas, hoping the rally would reverse sooner or later.

Alas, for at least one of these shorts, the reversal did not come in time when this morning the price of the 1st month natgas contract soared, spiking as much as 20% in minutes - the biggest intraday move higher since 2009 - with the price exploding higher once a barrier of stops at $4.40 was tripped, at which point furious short covering sent nat gas as high as $4.929 in just seconds, the highest since February 2014, when the U.S. experienced its "polar vortex" winter.

Putting the move in its long-term context shows just how breathless the recent short squeeze has been.

The question now is whether the fund that clearly was stopped out was along long oil in a pair trade, and whether the purge in the natgas short also means that the "long oil" leg is also now unwound. If so, expect oil to finally find a bid as the relentless selling from the past 2 weeks - perhaps the result of a fund forced to liquidate and underwater position(s) - may finally be over.