Natural gas extends gains on inventory drop speculation, frigid US weather

Natural gas extended yesterdays gains to further distance from three-week low, following a speculation for a larger than the 5-year average drop in US gas stockpiles, due to the chilly weather conditions over most of the densely populated US areas.

On the New York Mercantile Exchange (NYMEX), natural gas for delivery in March added 0.17% to trade at $4.832 per million British thermal units by 14:55 GMT. Prices hit a session high at $5.027 per mBtu, while day’s low was touched at $4.781 per mBtu. Yesterday prices surged by 9% to distance from the weakest level since January 22, while on February 5, the contract surged to a 4-year high.

Prices have soared 15% so far in 2014, after the energy source settled last year 26% higher, the best performance since 2005 and second straight annual advance.

CME Group Inc. announced last week, that effective from February 6th, the initial margin for next-month natural gas futures, traded on NYMEX, will increase almost 10% to $ 5 500 for speculators from $5 005. This will be the highest margin requirement in more than 4 years, and will be almost double the initial margin at the beginning of this year, which was $2 530.

According to Standard & Poor’s GSCI gauge of 24 commodities, gas futures are the most volatile commodity this year as volatility more than doubled from 31.64% last year to 80.2% in 2014.

Short-term weather outlook

NatGasWeather.com reported on February 12th that several winter storms track across the US in the coming week. A strong winter storm continues to track across the Southeast, causing wintry mix of precipitation. The storm will pass through the Carolinas and Virginia, bringing heavy snow, while strengthening to a more severe Northeastern storm. The latter will lead to heavy snowfall over the Northeast coast, which will be accompanied by strong winds. The ice and snow accumulations may cause some power issues.

Another round of light to moderate snowfall can be expected over the Midwest and Northeast on Friday as a fresh Canadian dose of cold Canadian air moves into US territory. The latter will usher into another cold blast and will lower temperatures to below-normal, and according to the website will keep strong natural gas and heating demand.

According to AccuWeather.com, temperatures in Cleveland on February 15th may bottom at 8 degrees Fahrenheit, 18 beneath average, while readings in Detroit may plunge to 2 degrees Fahrenheit, below the average of 22. Temperatures in Chicago are expected to hit 13 degrees Fahrenheit, 10 below normal.

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.

Extended forecast

NatGasWeather.com’s extended forecast for the period ended February 25th called for a very active weather pattern to continue through the third week of February. A fresh storm may develop over the northern US on February 18th-19th, accumulating snowfall and lowering temperatures to below-normal. A period of milder weather conditions is expected as a big ridge pushes through the central and eastern US around 19th-22nd February.

According to the website, this will ease natural gas demand over the highest-consumption states of the north, as daytime highs may finally get into the 50s and even 60s. A reinforcing shot of cold weather may return over the Midwest after February 22nd and a few days later into the Northeast with fresh snowfall.

US gas inventories levels

Stockpiles probably declined by 232 billion cubic feet in the week ended February 7, according to the median estimate of 10 analysts in a Bloomberg News survey. The five-year average drop is 162 billion. The Energy Information Administration (EIA) is scheduled to release its weekly US gas storage report tomorrow.

“The market has burned up 88 percent of last summer’s total refill” of stockpiles, said Stephen Schork, the president of the Schork Group Inc., a consultant in Villanova, Pennsylvania, cited by Bloomberg. “The current pace of deliveries is running 1.45 times greater than the seasonal trend.”

EIA reported last Thursday that US natural gas inventories fell by 262 billion cubic feet in the seven days through January 31st, less than the median analyst forecast of a 273 billion cubic feet drop. However, the decline outstripped the five-year average drop of 151 bcf and last year’s 129-bcf decrease during the comparable week.

Total gas held in US underground storage hubs fell to 1.923 trillion cubic feet, 28.8% below last year’s amount of 2.701 trillion cubic feet during the comparable week. The deficit to the five-year average widened to a record 22.4%, up from 16.6% a week earlier.

According to data by the Energy Department’s statistical arm, supplies have fallen 50% to 1.923 trillion cubic feet in the past 12 weeks through January 31st, the weakest level for that period since 2004.