Natural gas extends gains as winter storm tracks across the US Northeast

Natural gas extended yesterday’s gains as a winter storm tracked across the northeastern part of the US, lowering temperatures to much-below-normal and boosting demand for the power station fuel, at a time when stockpiles are already at a 10-year seasonal low.

On the New York Mercantile Exchange (NYMEX), natural gas for delivery in March soared by 5.75% to trade at $5.514 per million British thermal units by 13:08 GMT. Natural gas futures hit a session high at $5.558 per mBtu, the strongest level since February 5th, when prices touched a 4-year high at $5.734 per mBtu. Day’s low was touched at $5.453 per mBtu. The energy source advanced 9% last week, capping the first weekly gain since the 20% jump for the period ended January 24.

Prices have soared 29% 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 18th that a brief warm-up will occur late this week, which however won’t be as impressive as initially forecast. Until then, a fresh winter storm will develop over the Northeast today, bringing a new blanket of snow, and according to the website, this will keep strong natural gas and heating demand ongoing.

Thereafter, the brief warm-up is expected to take place at the end of the week into the weekend. High pressure formation will briefly move into the Midwest on late Wednesday into Thursday, bringing milder temperatures. On Friday, band of showers and thunderstorms will move ahead of a cold front, which will move out of the northern Plains. Snow showers and freezing temperatures will follow the storm as it sweeps across the northern US.

The warm-up will be brief as the cold front will move fast over the Great Lakes and the Northeast by late Friday or Saturday and another cold and snowy pattern will set up, bringing back heavy snow and ice.

According to AccuWeather.com, temperatures in Cleveland on February 25th may bottom at 14 degrees Fahrenheit, 14 beneath average, while readings in Detroit may plunge to 11 degrees Fahrenheit, below the average of 24. Temperatures in Chicago are expected to hit 11 degrees Fahrenheit, 14 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 March 3rd called for an impressive Canadian blast to bring much colder-than-normal temperatures over all of the central and eastern US at the beginning of next week. The highest-consumption states of the northern US will experience temperatures below zeros and into the single digits for several days, which according to the website will lead to continued strong natural gas and heating demand.

Fresh weather systems will track every few days through the Midwest and Northeast, with accumulating snowfall and reinforcing doses of cold air. Few of the systems have potential to develop into fairly impressive winter storms capable of dropping heavy snowfall. Strong natural gas demand is expected to close out the last week of February, according to the website.

US gas inventories levels

The Energy Information Administration said in its weekly storage report that US natural gas inventories fell by 262 billion cubic feet in the seven days through January 31st, less than the median forecast of 273 billion cubic feet, by 19 analysts in a Bloomberg survey. 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% in the past 12 weeks through January 31st.

At the same time, the US investment bank Goldman Sachs lowered its end-of-March inventory levels’ forecast for a second time to 1.2 trillion cubic feet, down from 1.39 trillion. The bank first trimmed its forecast to 1.39 trillion from an earlier estimate of 1.61 trillion cubic feet.

A separate report by Mizuho Securities USA Inc., cited by Bloomberg, showed inventories may drop to 1.1 trillion cubic feet by March 31, which would be the lowest since 2004.