Feb. 19 (Bloomberg) -- Natural gas futures surged to a five-year high in New York on speculation that frigid weather forecast to extend into March will erode stockpiles already at a 10-year seasonal low.
Gas rose 11 percent, the biggest gain in 20 months, as forecasts show cold air will cover most of the lower 48 states from Feb. 24 through March 5. Prices have jumped 45 percent this year as waves of arctic air boosted demand for the heating fuel, cutting stockpiles in early February to the lowest level for the time of year since 2004. The premium of March futures over April widened to a record of more than $1 as concern grew that supplies will tumble further before the cold weather ends.
“What we are seeing right now is a very short-term mentality on how do we get through the balance of winter,” said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York. “With the prospect of higher-than-anticipated heating demand at the end of the season and clearly diminished supply availability, the possibility of periodic shortages now looms.”
Natural gas for March delivery advanced 59.8 cents to $6.149 per million British thermal units on the New York Mercantile Exchange, the highest settlement since Dec. 3, 2008. Trading was 72 percent above the 100-day average at 2:43 p.m. Today’s percentage increase was the biggest since June 14, 2012.
Gas is the most volatile component this year in the Standard & Poor’s GSCI index of 24 commodities. March $7 calls were the most active options in electronic trading. They were 11.3 cents higher at 16 cents per million Btu on volume of 5,355 at 2:55 p.m. Calls accounted for 75 percent of trading volume.
Futures trading has averaged about 430,000 contracts a day so far this year, up 20% from the same period in 2013. Average open interest has increased 8 percent.
“A lot of brand new hedge-fund money is coming in,” said John Woods, president of JJ Woods Associates and Nymex floor trader. “You have a lot of daytime speculative traders moving in and you have a lot of algorithm traders looking at it and saying this is where the action is.”
Gas has surged 75 percent since the start of November as waves of winter storms and polar air sent temperatures tumbling, boosting demand.
The premium of March to April contracts widened to $1.199, a record for this time of year in data going back to 1994. The spread was 79.8 cents yesterday. The premium for April to October futures widened to 21.5 cents from 8 cents yesterday.
“The March-April contract spread is blown out because the market is hyper-focused on the very short-term gas demand and the possibility of having inadequate supplies next month,” Viswanath said.
Forecasts for the end of February and the beginning of March turned colder, with the lowest readings expected in the Midwest, MDA Weather Services in Gaithersburg, Maryland said today.
The high in Chicago on Feb. 25 will drop to 19 degrees Fahrenheit (minus 7 Celsius), 20 below normal, after rising to 48 degrees tomorrow, according to AccuWeather Inc. in State College, Pennsylvania. About 49 percent of U.S. households use gas for heating, with the largest consumers in the Midwest, U.S. Energy Information Administration data show.
“Supplies are tight, temperatures are projected to be below normal and we’re looking for tight supplies at the end of the heating season,” said Tim Evans, an energy analyst at Citi Futures in New York. “This leaves the upside open.”
Gas inventories probably fell 257 billion cubic feet last week, based on the median of 14 analyst estimates compiled by Bloomberg. The five-year average drop for the period is 133 billion. The EIA is scheduled to release its weekly stockpile report tomorrow.
Supplies totaled 1.686 trillion cubic feet in the week ended Feb. 7, 27 percent below the five-year average, a record deficit in government data going back to 2005.
Power grid operators including PJM Interconnection LLC, serving the mid-Atlantic states, and the California Independent System Operator Inc. said some power plants had difficulty receiving enough gas during this year’s cold snaps.
Supplies at TransCanada Corp.’s ANR pipeline storage system in the Midwest fell to 18 percent of total operational capacity today while Spectra Energy Corp.’s Egan storage cavern in Louisiana, which can ship fuel into the Northeast, was at 10 percent of capacity on Feb. 16. Both were the lowest in records going back to 2005, data compiled by Bloomberg show. Southern California Gas Co.’s storage system was less than 27 percent of capacity today, the least since March 2008.
U.S. inventories may drop to 1 trillion cubic feet in March, according to Viswanath and John Kilduff, partner at Again Capital LLC. That would decrease the amount of gas in storage to the lowest levels since 2003, government data show.
“Price are likely to continue their surge higher, likely carrying well above $6 to $7 and higher,” Kilduff said in a report today.
--With assistance from Mark Shenk in New York. Editors: Bill Banker, Charlotte Porter