Natural Gas Climbs to Three-Month High on Colder March Weather

March 11 (Bloomberg) -- Natural gas futures advanced to a three-month high in New York after a midday update called for colder weather later this month, signaling higher heating demand in the first days of spring.

Gas rose 0.6 percent after the forecast showed Arctic air extending from the Dakotas to the Southeast from March 21 through March 25. Earlier predictions showed the southern edge of the system would be limited to the Midwest. The cold may send supplies at the end of March below government estimates, said Aaron Calder, senior market analyst at Gelber & Associates.

“The noon updates on the weather reports are a little colder than what we saw this morning,” said Calder, who is based in Houston. “It’s late-season heating demand and it’s also challenging preconceived notions on where storage is going to end up.”

Natural gas for April delivery rose 2 cents to $3.649 per million British thermal units on the New York Mercantile Exchange, the highest settlement price since Dec. 6. Trading volume was 14 percent below the 100-day average at 3 p.m. Prices have climbed 8.9 percent this year.

June $4.55 calls were the most active gas options in electronic trading. They were up 0.2 cent at 1.5 cents per million Btu on volume of 4,074 contracts at 2:39 p.m. Calls accounted for 48 percent of options volume.

Implied volatility for at-the-money gas options expiring in April was 32.01 percent, up from 30.77 percent on March 8. May options volatility was 29.49 percent, up from 28.79 percent.

April-October

The discount of April contracts to October, a gauge of summer demand for gas, widened 0.4 cent since March 8 to 18.8 cents. The discount over the past month has been at its narrowest compared with any April-October spread for the same period going back to 2004.

Gas inventories in the week ended March 1 were 14.8 percent above the five-year average for the period, down from 16 percent the previous week, the Energy Information Administration said last week. A supply deficit to year-earlier levels widened to 14.8 percent from 12.1 percent, the most since July 2008.

Colder March weather than previously anticipated may cut supplies to 1.8 trillion to 1.9 trillion cubic feet before stockpiles start to increase in April and May, Alan Lammey, an energy analyst with WeatherBell Analytics LLC in Houston, said in an e-mail.

“If it appears to quickly rebuild, then we still have a good shot at seeing a return to the $3.20 to $3.40 area in coming weeks,” he said.

Nuclear Plants

Output from U.S. nuclear plants fell to 84,138 megawatts today, or 83 percent of capacity, the least since Dec. 1, according to U.S. Nuclear Regulatory Commission data compiled by Bloomberg. Production has fallen 12 percent from this year’s high reached on Feb. 1.

Reactor maintenance shutdowns, usually undertaken in the U.S. spring or fall, when energy use is lowest, may increase consumption of natural gas and coal to generate electricity.

U.S. gas production in December fell for the first time in four months, capping the slowest annual growth rate in three years, according to the monthly EIA-914 report on Feb. 28. Output slipped 0.7 percent to 82.57 billion cubic feet a day as operators in Louisiana, Texas and the Gulf of Mexico shut wells. Production was up 0.6 percent from December 2011.

The number of rigs drilling for natural gas dropped by 13 last week to 407, the least since March 1999, according to March 8 Baker Hughes Inc. report.

The EIA expects gas stockpiles at the end this month, which marks the end of the heating season, to drop to about 2 trillion cubic feet, down from 2.477 trillion at the same time last year but above the five-year average of 1.726 trillion, according to its Feb. 12 Short-Term Energy Outlook.

--Editors: Bill Banker, Charlotte Porter