Natural Gas Climbs to Most Since July 2011 on Record Supply Drop

Dec 19, 2013 3:13 pm ET

Dec. 19 (Bloomberg) -- Natural gas futures climbed in New York to the highest level since July 2011 following a government report that showed a record drop in U.S. inventories.

Gas rose 4.9 percent after the Energy Information Administration said stockpiles fell 285 billion cubic feet to 3.248 trillion in the week ended April 29. It was the largest weekly decline ever, besting the January 2008 record of 274 billion. Gas has surged 33 percent this year, the biggest gainer in the Standard & Poor’s GSCI gauge of 24 commodities.

’’It smashed the all-time record,’’ said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. ’’It was certainly a bullish number reflective of very cold weather and likely some well freeze-offs that hurt production.’’

Natural gas for January delivery jumped 20.9 cents to $4.46 per million British thermal units on the New York Mercantile Exchange, the highest settlement price since July 20, 2011. Trading volume was 89 percent above the 100-day average at 2:57 p.m.

The discount for January futures to February widened 0.6 cent to 2.9 cents. March gas traded 25.9 cents above the April contract versus 14.4 cents yesterday.

February $5 calls were the most active options in electronic trading. They were 7 cents higher at 11 cents per million Btu on volume of 2,796 at 2:59 p.m. Calls accounted for 69 percent of trading volume.

Average Drop

The inventory withdrawal was bigger than the decline of 263 million cubic feet analysts predicted in a Bloomberg survey. The five-year average drop for the period is 133 billion, EIA data show. Supplies fell 70 billion in the same seven days last year.

A deficit versus the five-year average widened to 7.4 percent from 3 percent the previous week. Supplies were 13.1 percent below year-earlier levels, compared with 7.2 percent in the prior report.

The size of the storage withdrawal also indicates that as onshore U.S. production grows, well shut-ins during cold weather are playing a bigger role in disrupting output than hurricanes have in recent years, said Schork and Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York.

“Going into the winter, the market appeared convinced that the industry was amply supplied,” Viswanath said. “Now, however, in the aftermath of the very cold weather and the resulting high demand and freeze-offs, these assumptions are possibly being tested.”

Gas Output

Gas production has fallen 25 billion cubic feet since the first week of December, mainly in the Rockies and the Midcontinent region, said Luke Larsen, an analyst at LCI Energy Insight, an energy analysis and consulting company in El Paso, Texas. Daily output in the lower 48 states slid 2.7 percent to average 72.49 billion in the week ended Dec. 12.

Unusually cold weather that swept the eastern U.S. over the past two weeks will give way to unseasonably warm weather from the Northeast to Texas over the next five days, according to MDA Weather Services in Gaithersburg, Maryland. Below-normal temperatures from Canada will then push in, with the strongest cold centered in the Midwest.

The high in Manhattan’s Central Park will jump to 66 degrees Fahrenheit (19 Celsius), 25 above normal, on Dec. 22 before sliding two days later to 36 degrees, 4 lower than average, according to AccuWeather Inc. in State College, Pennsylvania. Chicago’s high will drop to 15 degrees, 18 below normal, on Dec. 23.

Heating Demand

About 49 percent of U.S. households use gas for heating, says the EIA, the Energy Department’s statistical arm. The heating season from November through March is the peak-demand period for the fuel in the lower 48 states.

Gas today closed a key technical gap that was created after trading for Dec. 16 reached a high of $4.318, below the previous session’s low of $4.341, said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York.

The market has a tendency to shut gaps left like that, and in this case it creates a “technical acceleration point” to the upside, he said.

--Editors: Charlotte Porter, Dan Stets