Natural gas soars to 4-year high on inventory drop speculation, US winter storms

Natural gas soared to the strongest level in more than four years, following a speculation for a larger than the 5-year average drop in US gas stockpiles, after the strong winter storm that tracked across the Northern US yesterday, boosted 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 4.14% to trade at $5.781 per million British thermal units by 10:35 GMT. Natural gas futures hit a session high at $5.796 per mBtu, the strongest level since January 25th 2010, when prices touched $5.854 per mBtu. Day’s low was touched at $5.565 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 31% 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, and are also the second-biggest gainer after coffee.

US gas inventories levels

A government report may show tomorrow that US gas inventories fell by 249 billion cubic feet in the week ended February 14, according to Donald Murry, an economist at C.H. Guernsey & Co. in Oklahoma City, cited by Bloomberg. This will come at a time when stockpiles are already at a 10-year seasonal low. In comparison, the five-year average drop for the same period is 133 billion cubic feet.

The Energy Information Administration 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 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.

Short-term weather outlook

NatGasWeather.com reported on February 19th that a brief warm-up will build into the central US today, warming temperatures into the 50s and 60s. Actually, its been quite a long time since most of the US has experienced above freezing temperatures. A weak weather formation is expected to track across the Northeast today with a wintry mix of light showers, before warm southerly winds arrive on Thursday.

A new weather system will move out of the northern Plains later today, after which it will strengthen as it tracks into the central US. Heavy showers and thunderstorms will develop ahead of the cold formation, with freezing air and snow showers setting in behind it.

The warm-up will be brief as the high pressure front will move fast over the Great Lakes and the Northeast before the cold air moves in by late Friday. An impressive cold Canadian blast will bring much colder-than-normal temperatures over the highest-consumption states of the northern US on Sunday, with temperatures below zero and into the single digits. According to the website, once the cold weather gets established, it will remain for numerous days, maintaining strong natural gas and heating demand until the end of February.

According to AccuWeather.com, temperatures in Cleveland on February 27th may bottom at 15 degrees Fahrenheit, 13 beneath average, while readings in Detroit may plunge to 12 degrees Fahrenheit, below the average of 24. Temperatures in Chicago are expected to hit 12 degrees Fahrenheit, 13 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 4th called for an impressive Canadian blast to bring much colder-than-normal temperatures over the highest-consumption states of the northern US at the beginning of next week and to remain through March 2nd. The Midwest and Northeast will experience temperatures 10-20 degrees Fahrenheit lower than normal. A return to warm and dry conditions is expected over the western US as high pressure formation builds over the region.

However, 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. According to the website, strong natural gas demand is expected to close out the last week of February.