Bloomberg News

Natural Gas Moves Into Backwardation on Power-Plant Demand

July 09, 2012

Natural gas futures on the New York Mercantile Exchange moved into backwardation for the first time in 10 months as record heat boosted demand from power plants.

Futures for August delivery settled at $2.883 per million British thermal units on the Nymex, 0.7-cent higher than the September contract. Backwardation occurs when the front month contract trades at a higher price than contracts for later delivery.

August prices gained as hot weather spurred demand for gas from electricity generators to run air conditioners. The first six months of 2012 represented the warmest start of any year in records going back to 1895, according to the National Climatic Data Center in Asheville, North Carolina.

“We have enough heat and enough current power utility demand for natural gas to boost the cash and the nearby futures to a premium,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. Backwardation “doesn’t mean that we are running out of gas or that there’s real physical tightness as we still have a record inventory for the date.”

Traders buying back bets on price declines may also be contributing to the jump in front-month futures, Evans said.

U.S. gas stockpiles rose 39 billion cubic feet to 3.102 trillion in the week ended June 29, a record for that time of year, according to Energy Department data compiled by Bloomberg.

Gas on Aug. 29, 2011, the last time the front-month contracts were in backwardation, dropped 1.9 percent after Hurricane Irene cut power to more than five million homes and businesses from North Carolina to Maine.

To contact the reporter on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net

To contact the editor responsible for this story: Bill Banker at bbanker@bloomberg.net


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