Natural gas surges 2% on warm weather outlook

Natural gas futures rose more than 2% on Tuesday as weather forecasters predicted higher-than-average temperatures in key U.S. consuming areas, boosting demand prospects for the power-plant fuel. The energy source also gained as producers in the Gulf of Mexico returned evacuated personnel to platforms after tropical storm Karen dissipated but output was still 37% lower than normal.

On the New York Mercantile Exchange, natural gas for delivery in November surged 2.11% to $3.706 per million British thermal units at 14:40 GMT. The contract rose to a session high of $3.719, the strongest level since September 23, while days low stood at $3.633 per mbtu. The power-station fuel rose by nearly 2.8% on Monday, the best daily performance in more than a month, and extended its weekly advance to 5.5%, offsetting the preceding two weeks combined decline of 4.8%.

Natural gas extended gains as forecasting agencies predicted warmer-than-normal weather in key U.S. consuming areas. According to MDA Weather Services in Gaithersburg, Maryland, temperatures in the central and eastern U.S. through October 21 will be above the average for this time of the year.

When warm weather is expected, natural gas surges as increased electricity demand to power air-conditioning calls for more supply of the fuel, which is used for a quarter of the U.S. electricity generation. According to the Energy Information Administration, power generation accounts for 32% of U.S. gas demand and 50% of U.S. households use gas for heating.

Meanwhile, gas also drew support amid reduced output from producers in the Gulf of Mexico after tropical storm Karen forced workers to evacuate from platforms in the weekend, which led to a 48% loss in production. According to the Energy Information Administration, the Gulf accounts for 23% of U.S. crude production, 45% of petroleum refining capacity and 5.6% of domestic natural gas output. The U.S. Bureau of Safety and Environmental Enforcement said on October 7 that 1.4 billion cubic feet per day, or 37% of Gulf output, was still offline.

Phil Flynn, a senior market analyst at Price Futures Group in Chicago said for Bloomberg yesterday: “Temperatures have been above normal, which is supportive for gas demand. Traders are still pricing in some of the production lost because of the storm.”

Market players will also be keeping a close watch on this week’s inventories data. Early injection estimates for this week’s build data range between 90 billion and 103 billion cubic feet, compared to the five-year average increase of 84 billion cubic feet. During the comparable week last year, U.S. natural gas inventories rose by 73 billion cubic feet.

The Energy Information Administration reported last week that U.S. gas stockpiles rose by 101 billion cubic feet in the week ended September 27, underperforming analysts’ projections for a surge in the range between 82 and 100 billion cubic feet. Last week’s build was also well above last year’s 77 billion gain during the comparable week and the five-year average increase of 82 billion cubic feet.

Total gas held in underground U.S. storage hubs equaled 3.487 trillion cubic feet, which was 4.3% below last year’s inventories of 3.642 trillion. The surplus over the five-year average stocks of 3.438 trillion cubic feet widened to 1.4% after rising to 0.9% in the preceding week.