Natural gas surges over 3.5% on warm weather forecasts and average storage projections

Natural gas futures rose to a three-week high on Monday as weather forecasters predicted hot weather through late August that should crank up demand for the plant fuel. Meanwhile, Morgan Stanley expects natural gas inventories at the end of October to be in line with the last three years storage levels.

On the New York Mercantile Exchange, natural gas for delivery in September surged 3.73% to $3.494 per million British thermal units at 14:33 GMT. Futures held in range between days high of $3.501, the highest since July 26, while days low stood at $3.387 per million Btu. The fuel slipped 1.50% on Friday but still settled the week 4.49% higher after shedding almost 10% in the preceding two five-day periods.

Gas prices were supported as weather forecasting models pointed at above-normal temperatures through the end of the month in key consuming areas. MDA Weather Services in Gaithersburg, Maryland, predicted warmer than usual weather from the Northeast to the West Coast through September 2. When higher-than-normal temperatures are 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 the U.S. electricity generation. According to the Energy Information Administration, power generation accounts for 32% of U.S. gas demand.

Natural gas is expected to rally this week, according to a Bloomberg survey of analysts. Eight out of 15 participants, or 53%, wagered that prices will rise through August 23, while six, or 40%, predicted it will remain unchanged and one expected a decline.

Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami, said for Bloomberg: “The return to normal weather and above-normal in certain areas is supportive. You are going to find buyers come here in at these perceived low prices. What helped the rally is you had support around the $3.20-$3.25 area.”

Market players will also be keeping a close watch on this weeks EIA natural gas storage indicator report. Last week, the Energy Information Administration reported that U.S. natural gas stockpiles rose less than expected in the week ending August 9. The government agency said that inventories rose by 65 billion cubic feet to 3.006 trillion cubic feet, which was less than the previous year’s total 3.258 trillion cubic feet of gas held in underground storage hubs. At the same time, the surplus over the five-year average 2 963 billion cubic feet widened to 1.5% from the preceding week’s 0.7%, which marked the first surplus since March. The build was well over the five-year average and preceding years gain, but outperformed expectations.

Meanwhile, also supportive for the fuel, Morgan Stanley predicts that stockpiles will be in line with the average levels for the last three years. Adam Longson and Tai Liu, Morgan Stanley analysts, wrote in a report that inventories will total 3.86 trillion cubic feet by the end of October, moving prices in the third quarter to $3.42 per mBtu and $3.69 in the last three-months of the year.