Natural Gas Rises as Decline in U.S. Gas Drilling Signals Lower Production

Natural gas futures rose in New York after data showed the number of gas drilling rigs in the U.S. fell for the first time this year, a sign that producers are cutting exploration and production.

The number of gas drilling rigs fell 17 to 956 this week, the first decline since Dec. 25, according to Baker Hughes Inc. Gas also gained as sales of new U.S. homes surged last month by the most in almost five decades, boosting optimism that demand for the industrial fuel will increase.

“This might be a sign that producers are starting to cut back,” said Phil Flynn, vice president of research at PFGBest in Chicago. “The economy is getting better so demand should improve a little bit, and the market is trying to react to that.”

Natural gas for May delivery gained 12.9 cents, or 3.1 percent, to settle at $4.257 per million British thermal units on the New York Mercantile Exchange. The futures have fallen 24 percent this year.

The U.S. gas rig count fell to 665 on July 17, 2009, the lowest level since May 2002. The number rose to 973 in the week ended April 16, up 46 percent from July’s low.

The rig count could “retrace back toward the 900 level,” said Cameron Horwitz, an analyst at SunTrust Robinson Humphrey Inc. in Houston.

Power Demand

Gas also rose on anticipation demand for electricity from gas-fired power generators will increase as coal plants shut for annual maintenance.

U.S. power plants often schedule repairs for April and May after the winter heating season ends and before warm weather spurs demand for electricity. About 31 percent of gas demand comes from electricity generators, according to the Energy Department.

“Gas-fired power generation is again picking up share in the generation stack to the detriment of coal-fired generation,” said Horwitz. “With this dynamic in play, we believe gas prices have put in a floor at $4.”

U.S. gas inventories rose to 1.829 trillion cubic feet in the week ended April 16, 19 percent above the five-year average, the Energy Department reported yesterday. Supplies were 5.5 percent higher than a year ago.

Supplies typically increase from April to November as utilities and other large consumers buy gas for use during the cold-weather months, when demand exceeds production and imports.

U.S. Production

U.S. production reached a record 26.4 trillion cubic feet in 2009, rising 2.4 percent from the previous year, according to the Energy Department. The increase came as purchases of the fuel by factories, chemical plants and steel mills declined 7.7 percent during the worst recession since the 1930s. Demand may increase 2.2 percent this year.

Since 2005, total gas output in the U.S. has risen 12 percent, while consumption has advanced 3.8 percent, according to Energy Department data.

Wholesale natural gas at the benchmark Henry Hub in Erath, Louisiana, rose 11.63 cents, or 2.9 percent, to $4.0661 per million Btu, according to data compiled by Bloomberg.

Gas futures volume in electronic trading on the Nymex was 222,686 contracts as of 2:36 p.m., compared with a three-month daily average total of 234,000. Volume was 300,623 yesterday. Open interest was 859,714 contracts, compared with the three- month average of 824,000. The exchange has a one-business-day delay in reporting open interest and full volume data.

To contact the reporter on this story: Moming Zhou in New York at mzhou29@bloomberg.net.

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