Natural Gas Rises From Six-Month Low on Outlook for Heat Surge

Jul 16, 2014 2:41 pm ET

July 16 (Bloomberg) -- Natural gas futures rose from a six- month low in New York as forecasts for a surge of heat signaled increased demand for the fuel to power air conditioners.

“Short-lived, but potentially potent” hot weather will sweep most of the lower 48 states July 21 through July 25, MDA Weather Services said today. Gas stockpiles last week probably rose by more than the five-year average for the 13th consecutive week, analyst estimates show.

“It does look like there is plenty of heat in the forecast, for Texas especially and parts of the Midwest, so that will surely affect demand for gas,” said Ellen Stamm, global natural gas analyst at Schneider Electric in Louisville, Kentucky. “In the depths of summer, when the cooling demand is so intense and production is not increasing quite as fast as it was before, there’s less gas to be put into storage.”

Natural gas for August delivery rose 2.2 cents, or 0.5 percent, to settle at $4.119 per million British thermal units on the New York Mercantile Exchange. Volume for all futures traded was 40 percent below the 100-day average at 2:38 p.m. Prices yesterday fell to $4.097, the lowest settlement since Jan. 10. The futures are down 2.6 percent this year.

Forecasts for the Northeast and Midwest turned hotter for next week compared with yesterday’s projection, said MDA in Gaithersburg, Maryland. Temperatures will drop in the East from July 26 through July 30 with below-normal readings around the Great Lakes.

Hot Weather

The high in New York City on July 24 will reach 90 degrees Fahrenheit (32 Celsius), 6 above average, according to AccuWeather Inc. in State College, Pennsylvania. The next day, Dallas’s reading will be 103 degrees, 6 higher than average.

“This is a temporary phenomenon and if anything, it actually signals the peak of the summer season,” given forecasts for cooler weather to follow, said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York. “So the fact is, with $4 in sight we think the floor has now receded as the summer polar vortex unfolds.”

Waves of polar air that led to frigid weather in the first quarter and below-normal temperatures in the second and third quarters may also result in an early start to winter, Viswanath said.

“If this pattern continues, peak cooling demand we witness for gas doesn’t hold a candle to the sort of heating demand that could emerge in November and December,” Viswanath said. While gas prices may deteriorate for the next three weeks on mild summer weather, “we think we will see a relatively significant correction by year-end,” she said.

Inventory Estimates

Gas inventories expanded by 100 billion cubic feet last week, according to the median of 14 analyst estimates compiled by Bloomberg. Estimates ranged from gains of 86 billion to 103 billion. The five-year average increase for the period is 65 billion cubic feet. The Energy Information Administration’s weekly stockpile report is scheduled for tomorrow.

Stockpiles totaled 2.022 trillion cubic feet in the week ended July 4, rebounding by 1.2 trillion from an 11-year low in March, the EIA’s report last week showed. It was the fastest rate of storage injection during the first 14 weeks of the six- month refill season since 2001.

Stockpiles will reach 3.431 trillion cubic feet by the end of October as production expands for the ninth straight year, according to the EIA’s July 8 Short-Term Energy Outlook. It would be the lowest inventory level to start the peak heating demand season since 2008.

Alabama Storage

Marketed output will increase 4.1 percent to 73.08 billion cubic feet a day, setting a record for the fourth consecutive year. Gains are being driven by new wells coming online at the Marcellus shale in the Northeast.

People in the industry aren’t hedging much for the next six months because there is hope that prices will narrow a premium to year-earlier levels, Les Culpepper, director of gas management at Southeast Alabama Gas District, said in a July 11 phone interview from Andalusia, Alabama.

Culpepper said he doesn’t plan to completely refill the company’s 1.2 billion cubic feet of gas storage in Mississippi and Louisiana because prices tend to slump near the end of the stockpiling season.

“We don’t want to be completely full; we want to leave some space there just in case,” he said.