Natural gas surges to two-week high on outlook for freezing cold weather in the US

Natural gas advanced to the strongest level in almost two weeks as the frigid weather over most of the densely populated US areas continued to support strong demand for the heating fuel.

On the New York Mercantile Exchange (NYMEX), natural gas for delivery in March soared by 4.89% to trade at $5.649 per million British thermal units by 13:16 GMT. Natural gas futures hit a session high at $5.457 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 $5.372 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 28% 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 16th that a brief warm-up will occur late this week, which however wont be as impressive as initially forecast. Until then, a fresh weather system will develop over the Midwest on Monday, bringing a band of light to moderate snowfall and a reinforcing blast of cold Canadian air. The storm will then track into the Northeast on Tuesday, which according to the website, 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 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 last a little longer over the Northeast as the cold front wont track through until Saturday. Another cold and snowy pattern will set up on Sunday over the Great Lakes and the Northeast, bringing back heavy snow and ice.

According to AccuWeather.com, temperatures in Cleveland on February 23rd may bottom at 16 degrees Fahrenheit, 11 beneath average, while readings in Detroit may plunge to 11 degrees Fahrenheit, below the average of 23. Temperatures in New York are expected to hit 8 degrees Fahrenheit, 16 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 2nd called for a strong winter storm to sweep across the Northeast and Midwest at the beginning of the outlook period. The storm will bring a rapid break to the brief and muted warm-up over the northern US. Showers and thunderstorms will probably occur as the cold front pushes through, followed by light snowfall. A fresh cold Canadian blast will lower temperatures again to below-normal over the northern and eastern US, with overnight lows dropping into the single digits. According to the website, this will rapidly increase natural gas and heating demand.

Fresh weather systems will track every few days through the Midwest and Northeast, 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 NatGasWeather.com.

US gas inventories levels

The Energy Information Administration reported on Thursday that US natural gas inventories fell by 237 billion cubic feet in the seven days through February 7th, above the median forecast of 232 billion cubic feet, by 10 analysts in a Bloomberg survey. The decline also outstripped the five-year average drop of 162 bcf during the comparable week. EIA data showed that this was the largest February decline since 2007.

Total gas held in US underground storage hubs fell to 1.686 trillion cubic feet, the weakest level for this time of the year since 2004. US gas stockpiles were 33.9% below last year’s amount of 2.549 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 27.2%, up from 22.4% a week earlier.

Inventories at the East Region received a net withdrawal of 106 bcf and fell to 814 bcf, 27.9% below the five-year average of 1.129 trillion cubic feet. Stockpiles in the West Region fell by 42 bcf to 259 bcf and were 24.5% beneath the average. Inventories at the Producing Region slid by 89 bcf. At 613 bcf, they were 27.5% below the five-year average amount of 845 billion cubic feet.

“This latest string easily totals the largest cumulative three-week draw dating back to when the EIA began tracking the data in 1994,” said yesterday Mike Tran, an analyst at CIBC World Markets in New York, cited by Bloomberg.