March 28 (Bloomberg) -- Natural gas advanced as speculators who had sold contracts in bad bets on falling prices bought the positions back to protect gains or limit losses.

Natural gas has rallied 31 percent since Dec. 31 and 8 percent so far this week, forcing those with so-called short positions to buy. Short trades are bets prices will decline. Analysts had expected gas to decline as winter waned and the economy slowed.

``The buyers are out, there's a lot of buying on the dips,'' said Carl Neill, an energy analyst at Risk Management Inc. in Chicago. Gas is slowly turning people into believers that it is a worldwide market and ``the price will go higher.''

Natural gas for May delivery rose 11.3 cents, or 1.2 percent, to settle at $9.80 per million British thermal units at 3:22 p.m. on the New York Mercantile Exchange. Gas touched a two- year high of $10.294 on March 14.

The April contract expired yesterday at $9.578.

``It's up, up and away for natural gas, we're going to average about $11 from April to November,'' said Peter Linder, an analyst and senior adviser with Calgary-based DeltaOne Energy Fund. ``It's supply'' falling after two years of surpluses.

Stockpiles may end the heating season near 1.25 trillion cubic feet, possibly less then needed to enable inventories to rebuild through the summer, analysts have said. Last year at this time supplies totaled 1.517 trillion cubic feet.

Stockpiles fell 36 billion cubic feet last week to 1.277 trillion cubic feet, the Energy Department said yesterday.

Shrinking inventories and higher demand for gas-fired power generation ``will continue to support elevated natural gas prices,'' said Michael Dane, an analyst at SunTrust Robinson Humphrey in Houston.

Falling Imports

Declining imports of liquefied natural gas, or LNG, are also playing a role, he said.

LNG flow into the U.S. this year may fall below the average 2.1 billion cubic feet a day in 2007. Analysts credit LNG, gas that has been cooled to a liquid state so that it can moved by tankers to markets not connected by pipelines, with helping push inventories to a record 3.545 trillion cubic feet at the start of the winter demand season last November.

Gas prices ``should stay firm or trend higher'' because supplies have tightened and ``it remains a cheaper alternative fuel,'' said John Kilduff, vice president of risk management at MF Global Ltd. in New York.

BTUs

On an energy equivalency basis, oil used to heat buildings and run power plants traded at premium to natural gas in New York. Based on spot prices, gas is valued at $10.07 per million Btu compared with $13.74 per million Btu for fuel oil, according to data compiled by Bloomberg. Heating oil at $23.09 per million Btu equivalent is more than double the price of natural gas.

Commercial, industrial and power-generation demand accounts for about 78 percent of U.S. gas use, according to the Energy Department.

Imports of LNG for March are averaging 800 million cubic feet a day, about one-third the daily average of a year ago, Stacy Nieuwoudt, an analyst at Tudor, Pickering, Holt & Co. in Houston, said in a note yesterday.

``We're sitting on a real knife's edge at the moment, if we get a hot summer and we need LNG, we'll have to pay higher prices'' perhaps as much as $2 per million Btu than current prices, said Zach Allen, president of Pan EurAsian Enterprises in Raleigh, North Carolina, which tracks LNG shipments.

A moderate summer would allow demand to be met by current U.S. production and prompt gas prices to slide lower and blunt shipments of LNG, Allen said.

Traders have priced gas ``right in the middle'' of the two scenarios, allowing room for a $1 to $2 move in either direction, depending on weather, Allen said.

To contact the reporters on this story: Reg Curren in Calgary at rcurren@bloomberg.net.

Last Updated: March 28, 2008 16:14 EDT