Natural gas advances ahead of EIA weekly US gas storage report

Natural gas futures advanced on Wednesday, ahead of a government report that may show US gas inventories fell by a larger than the five-year average amount. The energy source continued to draw support by the freezing cold US weather conditions, which forced Americans to crank up the heating.

On the New York Mercantile Exchange, natural gas for delivery in March rose by 1.25% to trade at $5.004 per million British thermal units by 10:49 GMT. Prices hit a session high at $5.008 per mBtu, while day’s low was touched at $4.862 per mBtu.

On January 24th, prices touched $5.245 per mBtu, the strongest level since February 18th 2010 and settled the week 20.4% higher, the biggest weekly advance since October 2010. Prices settled last year 26% higher, the best performance since 2005 and second straight annual advance.

US gas inventories levels

EIA weekly US gas storage report, due to be released tomorrow, may show that natural gas inventories fell 224 billion cubic feet in the week ended January 24th, according to Donald Murry, an economist at C.H. Guernsey & Co. in Oklahoma City, cited by Bloomberg. According to data by EIA, the five-year average drop for the week was 162 billion, while supplies decreased by 191 billion a year earlier.

The Energy Information Administration reported last Thursday that US gas supplies fell by 107 billion cubic feet in the week ended January 17th, which was higher than the median analyst’ forecast for a net withdrawal of 103 bcf. Last week, US gas supplies dropped by 287 billion cubic feet, the largest decline on record.

Total gas held in underground storage hubs equaled 2.423 trillion cubic feet as of January 17th, 19.8% below last year’s 3.021 trillion stored. The deficit to the five-year average narrowed to 13.2% from previous week’s record 14.9%.

According to data by the Energy Department’s statistical arm, supplies have fallen 37% in the past 10 weeks. Jose Villar, an analyst with the U.S. Energy Information Administration, said, cited by Bloomberg: “Gas inventories dropped by 1.386 trillion cubic feet to 2.423 trillion from Oct. 31 through Jan. 17; the drop was 50 percent more than the five-year average decline of 927 billion and the fastest pace of withdrawals on record for the period.”

Meanwhile, the US investment bank Goldman Sachs lowered its end-of-March inventory levels’ forecast to 1.39 trillion cubic feet from an earlier estimate of 1.61 trillion cubic feet.

Short-term weather outlook

NatGasWeather.com reported on January 29th that the series of Arctic blasts pushing deep into the central and eastern US had finally come to an end. A wintry mix of precipitation will continue today over the Southeast before gradually easing and pushing south into Florida late in the day. Areas of light to moderate snowfall are expected to track across the Midwest Wednesday and Thursday.

Over the coming days, high pressure will build into the central and eastern US, allowing temperatures to rapidly warm to near or above normal across much of the central and eastern US, including the high population areas along the Northeast coast. According to the website, chilly air will remain over the Midwest and portions of New England, which will continue to support high natural gas and heating demand.

The first one may track out of the Plains Saturday and push into the eastern US Sunday, bringing areas of rainfall over the milder south and accumulating snows over the Midwest. A much stronger storm may develop next Tuesday and could lead to strong thunderstorms over the southern US and heavy snow with blizzard conditions over the northern US.

When cold 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 U.S. electricity generation. Above-average readings in the winter season have the opposite effect. Consumption usually picks up from November through March. According to the Energy Information Administration, power generation accounts for 32% of U.S. gas demand and 49% of U.S. households use the energy source for heating.

Milder long-term weather forecast

The long-term weather forecasting models called for overall milder conditions over much of the US. NatGasWeather.com’s extended forecast for the week ended February 12th, called for a very active weather pattern to take place, with the strongest of a series of cyclones probably hitting the central and eastern US on February 4-5th. The impressive cyclones, will bring a ridge of high pressure formations, which will push into the Mid-Atlantic and the Northeast coast with temperatures warming into 40s and 50s, locally 60s. However, the milder temperatures may be accompanied by heavy rainfall.

This will lead to lower natural gas demand over much of the South, Southeast and Mid-Atlantic, but it will maintain high demand over the northern US, although not as intensive compared to the recent cold. Heavy snowfall or ice may occur in the cold air over the Great Lakes and New England around February 6-8th, with potentially hefty accumulations.