Natural gas futures rose in New York, heading for the first weekly gain since mid-January, on speculation that a cold end to winter will spur demand for the heating fuel.
Gas climbed as much as 1 percent as MDA Weather Services predicted that "pieces" of cold weather will sweep through the central U.S. next week and into the East over the next 11 to 15 days, while the West turns warmer. Bursts of cold this winter have helped reduce U.S. inventories that rose to an all-time high in November.
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"We finally got some cold weather and we are burning gas," said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami. "We are running out of winter. You are getting some reaction to the cold weather."
Natural gas for March delivery increased 2.5 cents, or 0.8 percent, to $3.271 per million British thermal units at 1:11 p.m. on the New York Mercantile Exchange. Trading volume was 32 percent below the 100-day average for the time of day. The futures have gained 3.7 percent this week, heading for the first gain in five weeks. Gas is up 24 percent from a year ago.
March $3.30 calls were the most active gas options in electronic trading. They were unchanged at 1.3 cents per million Btu on volume of 815 contracts as of 1:14 p.m. Calls accounted for 48 percent of options volume.
The low temperature in Indianapolis on March 1 may be 23 degrees Fahrenheit (minus 5 Celsius), 5 below the usual reading, according to AccuWeather Inc. in State College, Pennsylvania. New York City's low may be 11 below normal at 22 degrees on March 7.
About 50 percent of U.S. households use gas for heating.
Goldman Sachs Group Inc. said gas prices may recover to $3.75 per million Btu in the second quarter as a more seasonal end to winter, increased structural demand and stable production reduce the need for fuel-switching at power plants, according to Johan Spetz, a London-based analyst with the firm.
Barring any large weather surprises in March, this winter will likely end up being about 3 percent milder than normal, compared with the previous winter that was 15 percent milder, Spetz said in a note to clients dated yesterday. The colder weather this winter translates into 700 billion cubic feet a day of additional heating demand for gas, "which is key to reducing the reliance on price-induced coal-to-gas substitution this year," he said.
The previous winter was the fourth-warmest on U.S. record, cutting demand, boosting a stockpile surplus and sending futures to a 10-year intraday low of $1.902 per million Btu in April.
Electricity generators burned a record 25 billion cubic feet of gas a day last year as they switched from costlier coal and an unusually hot summer spurred power usage, Energy Information Administration data show. Demand this year will drop 1.85 billion to 23.15 billion a day amid higher gas prices, the Energy Department's statistical unit said in its Feb. 12 Short- Term Energy Outlook.
Spetz expects fuel-switching demand from power plants to drop by 2.5 billion cubic feet a day this year.
A decline in hydroelectric generation in the Pacific Northwest may boost daily gas demand from April through September by 200 million to 250 million cubic feet, Biliana Pehlivanova, a New York-based analyst with Barclays Plc, said in a note to clients today.
Water supplies at The Dalles Dam on the Columbia River in Oregon, a regional proxy for hydropower, will be 10 percent below the 30-year average in the second and third quarters, according to the Northwest River Forecast Center. Water levels exceeded the norm by 34 percent in 2012 and by 43 percent in 2011, Pehlivanova said.
"This should support natural gas consumption in the region and reduce the need for coal-to-gas displacement," she said.
U.S. gas stockpiles totaled 2.4 trillion cubic feet during the week ended Feb. 15, widening a supply surplus versus the five-year average to 18 percent from 16 percent the previous week. A deficit versus year-earlier levels narrowed to 9.2 percent last week from 9.7 percent.
Inventories may end the heating season in March at about 2 trillion cubic feet, down from 2.477 trillion the same time last year but above the five-year average of 1.726 trillion, EIA data show. Supplies had risen to a record 3.929 trillion on Nov. 2.
Gas demand generated from cold weather over the next two weeks "will not be enough to dent the storage picture," Mike Fitzpatrick, editor of the Energy OverView newsletter in New York, wrote today. Gas prices may drop below $3 per million Btu, "but the run at last year's lows is less certain," he said.
For now, there is "key support" at $3.10, the 200-day moving average, and FitzPatrick recommends selling gas above $3.30.