Natural Gas Climbs as Hot Weather Boosts Air-Conditioner Use

May 27, 2014 3:02 pm ET

May 27 (Bloomberg) -- Natural gas futures climbed for a second day in New York as above-normal temperatures stoked demand from power plants, adding to concern that a supply shortfall will expand.

Gas advanced 2.3 percent. MDA Weather Services in Gaithersburg, Maryland, said temperatures will be above normal in most of the contiguous U.S. through June 5. Gas inventories were 43 percent below the five-year average in the week ended May 16, the biggest deficit for the period in government data going back to 2006.

“As the weather gets hotter and we start to challenge all- time high temperatures, we’re going to see more upside for the gas market,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “The forecasts are going to make it difficult for storage to catch up to the five- year average.”

Natural gas for June delivery rose 10 cents to settle at $4.505 per million British thermal units on the New York Mercantile Exchange. Volume for all futures traded was 25 percent below the 100-day average at 2:46 p.m. The futures are up 6.5 percent this year and have dropped 6.4 percent this month. June gas options expired today.

The high in St. Louis on June 3 may be 89 degrees Fahrenheit (32 Celsius), 7 above normal, according to AccuWeather Inc. in State College, Pennsylvania. Atlanta temperatures may reach 87 degrees, 3 more than average.

Power plants account for 31 percent of gas consumption, according to the Energy Information Administration, the Energy Department’s statistical arm.

Inventory Deficit

Gas stockpiles totaled 1.266 trillion cubic feet as of May 16, the lowest for that period since 2003, EIA data show.

Record production will boost inventories to 3.405 trillion by the end of October, which would be the lowest level for the time of the year since 2008, according to the EIA’s May 6 Short- Term Energy Outlook.

Russia’s deal to sell natural gas to China after a decade of talks will set a floor for prices of the liquefied fuel as the Asian nation is set to become the world’s leading consumer, according to Bank of America Corp.

The Russia-China agreement will also set a long-term price floor of $4 per million Btu for U.S. gas as regasification, liquefaction and transport costs of as much as $7 per million Btu from the U.S. to Asia become a “key component” of Henry Hub pricing, Francisco Blanch, the bank’s global head of commodities research, said in a note to clients today.

LNG supplies may rise by 18 billion cubic feet a day by 2020 to 43 billion cubic feet a day, an amount that can be “relatively easy” to absorb by emerging markets such as China, the bank said.

--With assistance from Isis Almeida in London.