Natural gas futures jumped to the highest price in almost six weeks after a government report showed a bigger-than-expected U.S. inventory decline.
Gas rose 1.7 percent after the Energy Information Administration said stockpiles fell 148 billion cubic feet last week to 3.168 trillion. Analyst estimates compiled by Bloomberg showed a decrease of 139 billion. Supplies were 4.4 percent below year-earlier levels, the widest deficit (DOENTUYP:US) in 17 months. Frigid Northeast and Midwest weather may boost demand next week.
“It’s a supportive report,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. “The current weather and weather forecasts for key gas-consuming areas for the weeks ahead are supportive of prices.”
Natural gas for February delivery increased 5.9 cents to $3.494 per million British thermal units on the New York Mercantile Exchange, the highest settlement price since Dec. 7. Trading volume was 34 percent above the 100-day average at 2:54 p.m. Gas has climbed 40 percent from a year ago.
April $4.50 calls were the most active gas options in electronic trading. They were 0.1 cent higher at 1 cent on volume of 6,760 contracts as of 2:53 p.m. Calls accounted for 47 percent of options volume.
Forecast models show there will be a “bigger cold outbreak” sweeping across the Northeastern, mid-Atlantic and Midwestern states from Jan. 22 through Jan. 26, according to Commodity Weather Group LLC in Gaithersburg, Maryland.
The low in New York City on Jan. 22 may be 19 degrees Fahrenheit (minus 7 Celsius), 8 below the usual reading, and Chicago will drop to 13 degrees, 5 below normal, according to AccuWeather Inc. in State College, Pennsylvania.
About 50 percent of U.S. households use gas for heating, EIA data show.
Colder weather will result in bigger inventory declines, “which is going to eat into the surplus,” said Brad Florer, a trader at Kottke Associates LLC in Louisville, Kentucky.
The stockpile decline last week was 7 billion cubic feet a day larger than weather-based modeling would suggest, mostly driven by increased demand from power generators favoring this fuel over coal, Aaron Calder, senior market analyst at Gelber & Associates in Houston, said in a note to clients today. Production was cut by 1 billion a day because of well freeze- offs in the San Juan Basin in Colorado and New Mexico, he said.
The “expansive nature” of this fuel switching implies the recent gain in gas futures will not entirely eliminate it, he said in the note.
A supply surplus to the five-year average increased to 11.1 percent during the week ended Jan. 11 from 10.7 percent the previous week, according to today’s report.
The surplus was down from a six-year high of 61 percent at the end of March. Record demand from electricity generators during an unusually hot summer and fuel switching from coal helped reduce the glut.
The EIA estimates that gas demand from power plants will slump 8.4 percent to average 22.87 Billion cubic feet per day in 2013 from a record 24.97 billion last year, according to the Jan. 8 Short-Term Energy Outlook.
January typically accounts for 25 percent of heating demand followed by February at 22.6 percent and December at 20.8 percent, according to Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York
Viswanath cut her outlook for 2013 gas prices by 50 cents to $3.50 per million Btu from a previous forecast of $4 in November. The reduction came because of high inventory levels and “infrequent outbreaks of cold weather” so far this winter, she said in a Jan. 15 note to clients.
The weather in the lower 48 states was the warmest in records going back to 1895 and the second-worst for weather extremes including drought, hurricanes and wildfires, according to the National Oceanic and Atmospheric Administration.
Gas production in the contiguous states rose to a record 73.54 billion cubic feet a day in October, up 0.4 percent from a revised 73.22 billion the previous month, according to the monthly EIA-914 report on Jan. 7.
Output gains have been driven by drilling technologies, such as hydraulic fracturing, or fracking, that have made it more economical to extract gas from shale deposits including the Marcellus in the Northeast.
The boom in oil and natural gas production helped the U.S. cut its reliance on imported fuel. America met 83 percent of its energy needs in the first nine months of last year, government data show. If the trend goes on through 2012, it will be the highest level of self-sufficiency since 1991.
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