When Producers Stop Hedging, Watch Out: A Natural Gas Rally Ahead?

COT Report: The Market Thermometer of Smart Money

Anyone active in commodities, currencies, or equity index markets knows how challenging it is to anticipate price movements. However, there is a tool that offers a glimpse behind the scenes of the markets: the COT Report, short for Commitment of Traders Report. Published every Friday by the U.S. Commodity Futures Trading Commission (CFTC), this weekly report reveals the positioning of major market participants in futures contracts.

The COT Report classifies traders into three main categories:

• Commercials – These are producers, processors, and large companies that physically handle commodities and use futures contracts to hedge against price fluctuations. In CFTC terminology, they’re often listed as “Producer/Merchant/Processor/User.”
• Non-Commercials – This group includes institutional speculators such as hedge funds, asset managers, and large traders who do not use commodities for industrial purposes, but solely for speculative gain.
• Retail Traders or Small Speculators – The least influential group, composed of individual traders and small investors.

Put simply, the COT Report tells us where the “smart money” is betting. By showing whether these key players are predominantly buying or selling, it can provide valuable insights into potential trend reversals or confirmations.

Hedging and Price Trends: Why Producer Positioning Matters

When analyzing a commodity like natural gas, one of the most insightful groups to observe is the Producer/Merchant/Processor/User category. These participants are directly involved in the physical production and processing of the commodity. They use futures not to speculate, but to hedge against unfavorable price movements.

The logic is straightforward but powerful:
When gas prices are high, producers fear a future decline. To lock in favorable prices, they begin selling futures contracts, increasing their short exposure. This leads to a decline in their net position. Conversely, when prices are low, producers are less inclined to hedge, and if they anticipate a price rebound, they may start taking long positions.

In the chart below (assumed to be part of your blog post), we observe that peaks in producer short positions frequently coincide with major price tops. This pattern is especially pronounced in natural gas, a commodity highly sensitive to seasonality, geopolitical shocks, and supply-demand imbalances.

Producer/Merchant Net position on Nat Gas – Source: Forecaster.biz

Are Natural Gas Producers Now Betting on a Price Rise?

Natural gas producers are among the best-informed market participants. They have access to real-time data on extraction costs, logistical challenges, customer demand, and seasonal consumption forecasts. This makes them what we might call “unintentionally smart traders”: they don’t act to speculate but to protect themselves – and their moves often carry significant predictive value.

As shown in the accompanying chart, every time producers’ net short positions shrink – or even turn positive – natural gas prices tend to be at or near a bottom. In other words, when producers stop hedging, they’re often signaling that the worst may be over and that a potential price recovery is on the horizon.

That’s precisely what appears to be happening now (Red arrow on the chart below). For the first time since 2020, producers’ net position in natural gas has turned positive. This shift suggests they are no longer focused on protecting against price drops—but are instead exposed to (and potentially anticipating) an upward move in prices. It’s a clear signal of growing optimism about the market outlook.

Both the volume and price patterns currently observed closely resemble those seen in 2020, just before natural gas embarked on one of the most powerful bullish trends in its history.

Producer / merchant net positions show the same pattern as in 2020 — just before a major natural gas rally.. – Source: Forecaster.biz

Natural Gas Seasonality Signals a Bullish Window Ahead

One of the most effective ways to conduct solid financial analysis is by combining different methods and looking for convergence between them.

When it comes to natural gas, seasonality offers an especially interesting perspective. As shown in the chart below, the 2025 price trend is closely following its 20-year seasonal average. With a correlation above 70%, it’s easy to spot that—historically—from this point of the year through December, natural gas tends to rise.

Natural gas in 2025 is tracking its 20-year seasonal pattern — if the correlation holds, a year-end rally could follow.– Source: Forecaster.biz

Thanks to the Forecaster Terminal, we can select this specific time frame (highlighted on the chart) and instantly retrieve past performance statistics for natural gas:

• ✅ Percentage of positive years (last 20): 75%
• 📈 Average return in positive years: +29.8%
• 📉 Average return across all 20 years: +17.7%

The seasonal message (that matches with the COT report message) is clear: we’re entering a period that has historically been very favorable for a natural gas rally.

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Originally Published July 7, 2025