Natural gas rallies to five-week high on warm weather forecasts

Natural gas rose by 3% to the highest since July 25 as weather forecasting models pointed at warmer-than-average temperatures across key consuming areas, thus boosting demand for the power plant fuel.

On the New York Mercantile Exchange, natural gas for delivery in October rose to $3.652 per million British thermal units at 9:38 GMT, up 1.97% on the day. The contract rose by 2.9% earlier in the day to a five-week high of $3.685 per mBtu, while days low stood at $3.609. The fuel slipped 0.9% on Friday but settled the week 3.6% higher after surging 7.8% in the preceding two five-day periods.

Natural gas futures extended gains on Monday as weather forecasters continued to predict warmer-than-usual weather across key consuming U.S. areas. According to AccuWeather Inc. in State College, Pennsylvania, the western half of the U.S. will experience higher-than-average temperatures between September 2 and September 11.

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. Mild temperatures have the opposite effect. According to the Energy Information Administration, power generation accounts for 32% of U.S. gas demand.

Stephen Schork, the president of Schork Group Inc., a consultant in Villanova, Pennsylvania., said for Bloomberg: “Weather in the northern part of the U.S. is very warm, thus gas demand for electricity is also very strong. A lot of speculative money moved to the sidelines this summer and it looks like that money could be coming back into the market.”

Market players will be keeping a close eye on this weeks EIA U.S. natural gas storage data. Early injection estimates range between 45 billion and 53 billion cubic feet, compared to the five-year average build of 60 billion. During the comparable week last year, natural gas stockpiles rose by 33 billion cubic feet.

Last Thursday, the Energy Information Administration reported that U.S. natural gas storage surged by 67 billion cubic feet in the week ended August 23, 1 million above the five-year average build of 66 billion cubic feet, and surpassing last year’s 64 billion gain during the comparable week. According to a Bloomberg survey of 25 analysts, inventories were expected to rise by 62 billion cubic feet.

Total gas held in underground storage hubs equaled 3 130 billion cubic feet as of last week, 7% below last year’s 3 365 billion. Reserves however remained 1.5% above the five-year average stockpiles at 3 085 billion cubic feet.

The report also showed that stocks in the East Region rose by 49 billion cubic feet and were 107 billion below the five-year average. Inventories in the Producing Region received a net injection of 16 billion cubic feet to 978 billion, 95 billion above the five-year average.