October 28, 2016 / 9:46 PM / 3 years ago

U.S. gas futures for 2017 lead market as funds bet on pipeline delay

NEW YORK (Reuters) - Potential delays in pipeline construction have prompted hedge funds to pile into U.S. natural gas futures for 2017, creating an anomaly in prices.

Crews from Southern California Gas Company and outside experts work on a relief well at the Aliso Canyon gas field above the Porter Ranch section of northwest Los Angeles, California in this December 9, 2015 pool photo. REUTERS/Dean Musgrove/Pool

Gas futures for 2017 hit 16-month highs last week as worry over the delay of two big pipelines in the U.S. Northeast - Rover and Atlantic Sunrise - exacerbated concerns that gas supplies may not keep up with demand and export growth forecast for next year.

“What it looks like right now is supply is going to be quite tight in the summer, or until you get those pipes going,” said Harry Arora, chief investment officer at ARCIM Advisors, a gas-focused hedge fund in Greenwich, Connecticut.

Arora is betting on the possibility of 2017 prices going above $5 if a pipeline crunch comes on the heels of a brutally cold winter and amid accelerating demand for liquefied natural gas (LNG).

Since hitting a June 2015 high of $3.41 per million British thermal units last week, the 2017 strip has fallen to $3.18 per mmBtu as unseasonably warm weather weighed on prompt gas prices. Yet, it trades above other calendar years for gas, an anomaly as one calendar strip seldom bucks the trend set by the rest of the gas futures curve.

“Managed money net positioning is at its highest since 2014 as bullish bets have firmly been focused on the 2017 portion of the curve,” said Stefan Revielle, natural gas commodity strategist at Morgan Stanley.

David Einhorn’s prominent hedge fund Greenlight Capital, which typically dabbles in U.S. equities and corporate debt, is another betting on bullish gas prices for next year. The fund said in an investor letter in May that bought 2017 gas at $2.71 per mmBtu and 2018 at $2.84. Greenlight’s positions are still in the money despite despite this week’s price collapse.

Analysts expect U.S. gas demand to hit a record high of 83.4 billion cubic feet in 2017.

Managing that will be harder without new pipelines.

“Many of the Northeast pipeline expansions, initially expected in the second half of 2017, are now more likely to be completed in first half of 2018, which has shifted production growth expectations,” Morgan Stanley’s Revielle said.

For now, Rover’s builder Energy Transfer Partners LP says it expects completion of the pipeline by 2017. But Atlantic Sunrise’s builder Williams Cos Inc said it expects partial service in the second half of 2017 and full service in mid-2018.

Editing by Cynthia Osterman

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