Natural Gas Jumps to $5 for First Time Since 2010 on Cold Blast

Jan 24, 2014 3:23 pm ET

Jan. 24 (Bloomberg) -- Natural gas futures surged above $5 for the first time in more than three years as U.S. demand soars and stockpiles tumble during a blast of arctic weather.

Gas jumped 9.6 percent in the biggest daily gain in 19 months. January is on track to be the coldest month of the century in the lower 48 states, according to Commodity Weather Group LLC. U.S. inventories of the fuel, used to heat 49 percent of U.S. households, have dropped at a record pace during the heating season, government data show.

“It hit the magical $5 number,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. “There’s not enough supply and a lot of demand. It’s not just cold in one market, it’s brutally cold from Chicago heading east.”

Natural gas for February delivery rose 45.2 cents to $5.182 per million British thermal units on the New York Mercantile Exchange, the highest settlement since June 15, 2010. The percentage increase was the largest since June 14, 2012. Trading volume was double the 100-day average at 2:38 p.m.

Prices are up 20 percent this week, the biggest gain since the seven days ended Oct. 29, 2010. The futures have surged 23 percent so far this month, the top performer in the Standard & Poor’s GSCI index of 24 commodities.

The premium of February to March futures increased 3.3 cents to 18.4 cents, the widest spread for the first two futures months since February 2004. March gas traded 57.7 cents above the April contract, compared with 28.9 cents yesterday.

Spread Trading

“It’s weather, plain and simple,” and the March-April spread is a classic spread to trade in the gas market, said John Woods, president of JJ Woods Associates and Nymex floor trader. “You’ve got this vortex coming into a market that was void of any direction. We finally have it.” Gas may top out at around $5.25 to $5.30, he said.

February $5.15 calls were the most active options in electronic trading. They were 22.6 cents higher at 23.7 cents per million Btu on volume of 10,844 at 2:46 p.m. Calls accounted for 81 percent of trading volume.

Chicago was colder than the South Pole at the start of January as energy consumption rose and gas production sites reported disruptions because of freezing conditions.

A deficit of U.S. stockpiles versus the five-year average widened to a record 14.9 percent earlier this month. Spot gas for delivery in New York City and New England jumped to all-time highs this week amid surging demand and pipeline constraints.

Four of the top 10 coldest days of the 21st century in the contiguous U.S. states occurred this month, said Matt Rogers, president of Commodity Weather Group in Bethesda, Maryland.

Weather Warnings

Wind chill warnings and advisories stretch from Canada to the U.S. Gulf Coast and a winter storm warning has been issued in Houston, according to the National Weather Service. The service forecast snow, sleet, and rain over parts of Texas and the central Gulf Coast through early tomorrow.

“A wave of low pressure along the cold front currently settling into the southern states is expected to spread a rare coating of ice across southeast Texas and southwestern Louisiana,” the service said.

Temperatures in the Northeast will be in the low teens to single digits through this weekend, the service said. Readings may reach seasonal levels by Jan. 25 before dropping again.

Chicago will have a low of minus 14 degrees Fahrenheit (minus 26 Celsius) on Jan. 27, 32 degrees below normal, according to AccuWeather Inc. in State College, Pennsylvania. The high for the day will be 1 degree. Boston’s low that day will be 12 degrees, 10 degrees below the average.

Price Floor

“The spot and front-month price has certainly got a lift from the recent weather, and the prospect of continued cold weather into February has exacerbated the move,” said Scott Hanold, energy analyst at RBC Capital Markets in Minneapolis, Minnesota. “There is a big change in the storage situation that has the market excited.”

Hanold, who was No. 1 in Bloomberg rankings of gas-price forecasting in the fourth quarter, said the drawdown in inventories this winter has moved the floor up for gas prices this spring and summer to about $4 from $3.50.

Gas inventories dropped by 1.386 trillion cubic feet to 2.423 trillion from Oct. 31 through Jan. 17, 50 percent more than the five-year average decline of 927 billion for the period, Jose Villar, an analyst with the U.S. Energy Information Administration, said in an e-mail yesterday. It’s the fastest pace of withdrawals on record for the period, he said.

Goldman Outlook

Goldman Sachs Group Inc. cut its end-of-March inventory projection to 1.388 trillion cubic feet from an earlier outlook of 1.605 trillion, Samantha Dart, a London-based analyst with the bank, said in a Jan. 20 note to clients. Lower stockpile levels with average weather in February and March mean gas prices may be closer to $4.40 to $4.50 this year compared with the bank’s current forecast of $4.25, she said.

“We’re a market right now that is focused pretty exclusively on the cold-weather shock,” said Brison Bickerton, head of strategy at Freepoint Commodities LLC in Stamford, Connecticut. “People have forgotten a little how powerful winter weather can be.”

--With assistance from Brian K. Sullivan in Boston. Editors: Bill Banker, Charlotte Porter