By GREGORY MEYER - Wall Street Journal
While U.S. natural-gas prices have drifted to levels last seen in 2002, a number of hedge-fund managers specializing in the commodity still aren't buying.
A smaller, more domestic market than oil, gas is notorious for burning traders. The 2006 blowups of hedge funds Amaranth Advisors and MotherRock are legendary.
The market has stayed volatile since then, with the front-month gas future contract soaring above $13 a million British thermal units last summer and then plunging, settling Friday at $3.729. But few seem ready to put money on a price rebound.
"I'm not bullish on natural gas," said Andrew Rowe, managing director of SandRidge Capital LP, a $650 million gas-trading firm that returned 21% last year. "The markets always rally, but I think it would be hard for natural gas to sustain rallies this year."
Natural gas plummeted alongside other commodities in 2008 as the U.S. recession deepened. Unlike several other commodities, notably crude oil, it has kept falling this year. Industry is expected to consume far less gas, and there also are signs that despite a colder-than-normal winter, some consumers reined in home gas use to keep heating bills down. Mr. Rowe recounts a conversation with a banker from Boston who said he'd set his thermostat at 15 degrees Celsius to save cash.
U.S. gas is widely traded by hedge funds, with 74 large speculators betting futures prices will fall and 57 betting on a gain as of Tuesday, according to the Commodity Futures Trading Commission.
Investor withdrawals from hedge funds have contributed to declining gas-trading volumes on the New York Mercantile Exchange. They've added challenges for smaller fund managers trying to attract capital.
"It's very hard," said Larry Roche, portfolio manager at Battalion Capital Management LLC, a $15 million gas-focused fund firm whose trades returned 15% last year.
Mr. Roche said supplies of liquefied natural gas are poised to increase, potentially crippling any price gains. "Right now there's no reason for natural gas to rally," he said.
Plunging gas prices have translated into big profits for some funds. The Citigroup AAA Master Fund, which is managed by AAA Capital Management Advisers Inc., returned 64.6% in 2008 partly because natural gas "prices plunged from $14 to about $5," a recent securities filing disclosed.
Write to Gregory Meyer at greg.meyer@dowjones.com
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