Hedge funds are more bullish about US natural gas prices than at any time for almost three years, according to position records published by regulators and exchanges.
By April 4, hedge funds and other money managers had amassed a net long position in the two main futures and options contracts linked to US gas prices equivalent to 3,280 billion cubic feet
Fund managers had boosted their net long position for five consecutive weeks by a total of 1,082 billion cubic feet, taking it to the highest level since May 2014.
Hedge fund long positions outnumbered short positions by a ratio of nearly 3.6:1 on April 4, up from just 2.2 on February 28, and nearing the recent high of 4.2 on January 17.
Fund managers have responded to signs the gas market is tightening, despite one of the warmest winters in the last 50 years.
Strong exports and the continued weakness of gas output have offset warm weather and reduced consumption from electric power producers.
The United States exported a record 270 billion cubic feet of gas in January, up from 169 billion cubic feet in the same month a year earlier.
Gas stocks finished winter at just 2,051 billion cubic feet, which was 426 billion cubic feet, or 17 per cent, lower than a year earlier.
As a result, gas prices have risen to limit power producers' consumption especially during the coming summer air-conditioning season.
Futures prices for gas delivered at Henry Hub in June 2017 have risen to $US3.31 per million British thermal units (BTUs), up 16 per cent since February 22.
Futures prices for deliveries in June 2017 are now trading at a premium of 48 cents per million BTUs over June 2018 in an effort to limit short term power burn.
There may be fundamental reasons for hedge funds' bullishness towards gas but the concentration of long positions has become a source of downside price risk in the short term.
Large concentrations of hedge fund positions on one side of the market often presage a sharp retracement in prices when managers attempt to unwind them and lock in profits.
Gas prices could be vulnerable to a correction if temperatures across the main US population centres remain mild over the next 5 to 6 weeks, cutting gas consumption more than usual.
According to the US National Oceanic and Atmospheric Administration, temperatures are forecast to be above normal across most of the southern and eastern United States through the next month.
Gas prices have risen to the point where power producers have a strong incentive to reduce the number of hours they run gas-fired units and increase run rates for coal-fired units.
If gas stocks rise rapidly during the remainder of April and May there is a risk fund managers will begin to liquidate some of their long positions and put prices under pressure.