Natural gas close to biggest weekly rally since 2010 on dangerously cold US weather

Natural gas was close to cap its biggest weekly gain since October 2010, after yesterday futures advanced to a five-year high as the dangerously cold weather in the US depleted stockpiles at a furious pace, sending them to a 10-year seasonal low, EIA data showed yesterday.

On the New York Mercantile Exchange (NYMEX), natural gas for delivery in March surged by 3.45% to trade at $6.273 per million British thermal units by 13:05 GMT. Natural gas futures hit a session high at $6.293 per mBtu, while day’s low was touched at $6.088 per mBtu. Yesterday, prices touched $6.378 per million British thermal units, the strongest level since December 4th 2008. The energy source headed for a 21% increase this week, which will be the largest since October 2010.

Prices have soared 45% so far in 2014, as the US experienced the coldest January in two decades, which boosted demand for the heating fuel and cut stockpiles at the second week of February to a 10-year low for that time of the year. The energy source settled last year 26% higher, the best performance since 2005 and second straight annual advance.

“Weather forecasts will cause price volatility through March but we expect end-March storage to come in at 1.1 trillion cubic feet, the lowest since 2004,” wrote in an e-mailed report Adam Longson, a New York-based analyst for Morgan Stanley, cited by Bloomberg. He also said that prices should decrease below $4 in the third quarter, as market overestimates costs to refill stockpiles.

CME Group Inc. announced earlier this month, 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

The Energy Information Administration reported yesterday that US natural gas inventories fell by 250 billion cubic feet in the seven days through February 14th, below the median forecast of 257 billion cubic feet, by 16 analysts in a Bloomberg survey. The decline, however, was almost double the five-year average drop of 133 bcf during the comparable week.

Total gas held in US underground storage hubs fell to 1.443 trillion cubic feet, the weakest level for this time of the year since 2004. US gas stockpiles were 40.3% below last year’s amount of 2.418 trillion cubic feet during the comparable week, which is also an all-time high. The deficit to the five-year average widened to a record 33.9%, up from 27.2% a week earlier.

Inventories at the East Region received a net withdrawal of 129 bcf and fell to 685 bcf, 34.7% below the five-year average of 1.049 trillion cubic feet. Stockpiles in the West Region fell by 30 bcf to 229 bcf and were 30.4% beneath the average. Inventories at the Producing Region slid by 91 bcf. At 529 bcf, they were 34.4% below the five-year average amount of 806 billion cubic feet.

According to data by the Energy Department’s statistical arm, supplies have fallen 50% in the past 12 weeks through January 31st.

Dangerously cold short-term weather outlook

NatGasWeather.com reported on February 21st that a strong springlike storm is tracking into the eastern US, leaving a band of showers and strong thunderstorms along the cold front and heavy snowfall over the Great Lakes. The storm is expected to encompass numerous regions as it stretches from Canada to the Gulf of Mexico.

The initial storm won’t be very impressive, but it will make way for colder ones to come. Tomorrow, the weather will be relatively calm, before on Sunday a very strong cold Canadian blast brings much colder-than-normal temperatures over the northern Plains and Midwest, with temperatures well below zero.

The website warned that even more impressive and dangerously cold Arctic blast is expected to follow on Tuesday through Thursday with record breaking freezing temperatures, which will lead to very high natural gas and heating demand. Temperatures in the Great Lakes region may drop well below -25 degrees Fahrenheit and well below zero for portions of the Northeast, with only single digits and teens moving deep into the Mid-Atlantic and parts of the Southeast.

Extended forecast

NatGasWeather.com’s extended forecast for the period ended March 6th called for an impressive Arctic blast to bring much colder-than-normal temperatures over much of the central and eastern US at the beginning of next week. The Midwest and Northeast will experience brutally cold temperatures well below zero degrees Fahrenheit for at least the first 5 days of the outlook period.

Fresh Canadian type weather systems will track every few days through the Midwest and Northeast, with light snowfall and reinforcing doses of cold air. The cold blasts may push deep through the Mid-Atlantic and Southeast with single digits temperatures, boosting nation’s natural gas and heating demand. The website predicted very cold air over the northern US and milder conditions over the far south.

According to AccuWeather.com, temperatures in Cleveland on February 27th may bottom at 6 degrees Fahrenheit, 22 beneath average, while readings in Detroit may plunge to 7 degrees Fahrenheit, below the average of 24. Temperatures in Chicago are expected to hit 6 degrees Fahrenheit, 19 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.