Natural Gas Climbs to Three-Week High on Outlook for Hot Weather

Natural gas futures advanced to the highest settlement price in almost three weeks on forecasts for above-normal temperatures that would boost demand for the power-plant fuel to run air conditioners.

Gas gained 0.9 percent after Commodity Weather Group LLC in Bethesda, Maryland, predicted warmer-than-average weather in the Northeast and Great Lakes region through May 24. The high in New York on May 22 may be 85 degrees Fahrenheit (29 Celsius), 13 more than usual, according to AccuWeather Inc. in State College, Pennsylvania.

“The weather continues to confound the bears,” said Phil Flynn, a senior market analyst for Price Futures Group in Chicago. “Temperatures have gone from colder than normal to warmer than normal. There’s been an incredible amount of volatility with the weather situation.”

Natural gas for June delivery rose 3.5 cents $4.09 per million British thermal units on the New York Mercantile Exchange, the highest settlement price since May 1. Trading volume was 28 percent below the 100-day average at 2:42 p.m. Prices have climbed 22 percent this year.

The discount of June to October futures, a measure of supply expectations for the summer, widened 0.6 cent to 8.8 cents.

June $3.95 puts were the most active options in electronic trading, falling 1.5 cents to 2.6 cents per million Btu on volume of 641 at 3:06 p.m. Puts accounted for 56 percent of trading volume.

Hedge Funds

Hedge funds reduced bullish natural gas bets by the most in three months last week. Money managers cut net-long positions, or wagers on higher prices, by 3.7 percent in the seven days ended May 14, the biggest drop since Feb. 12, according to the Commodity Futures Trading Commission’s May 17 Commitments of Traders report.

The measure climbed last month to the highest level in records dating back to January 2010.

The high in Cleveland on May 22 may be 80 degrees Fahrenheit, 10 more than average, according to AccuWeather. Power generation accounts for 33 percent of U.S. gas demand, according to the Energy Information Administration, the Energy Department’s statistical arm.

Futures jumped the most in three weeks on May 17 after the U.S. conditionally approved the Freeport LNG liquefied natural gas export project in Texas.

The Freeport project was the second to receive approval from the Energy Department to send gas to countries that don’t have free-trade agreements with the U.S. The terminal would be able to export 1.4 billion cubic feet a day. The Freeport development, partly owned by ConocoPhillips (COP), Dow Chemical Co. (DOW) and Osaka Gas Co. (9532), must still win approval from the Federal Energy Regulatory Commission.

LNG Exports

In May 2011, the department conditionally approved Cheniere Energy Inc.’s Sabine Pass LNG Terminal in Louisiana for a rate of as much as 2.2 billion cubic feet a day. The project won FERC approval in April of 2012. The government has weighed 20 applications for export terminals in recent months, which could ship the equivalent of 41 percent of U.S. total production this year, Energy Department data show.

The U.S. may export 6.5 billion to 8.5 billion cubic feet a day of gas by 2020, Adam Longson, an analyst at Morgan Stanley in New York, said in an e-mailed report today.

The Energy Department “will only need to approve two more projects by early- to mid-2016 in order for U.S. LNG exports to reach the low end of our estimates,” Longson said.

Gas prices at the benchmark Henry Hub in Erath, Louisiana, will average $3.80 per million British thermal units this year, higher than the previous estimate of $3.52, the EIA said May 7 in its monthly Short-Term Energy Outlook. The average may slump to $3.77 in the third quarter before climbing to $3.92 during the final three months of the year.

Gas inventories totaled 1.964 trillion cubic feet in the week ended May 10, 4.1 percent below the five-year average and 26 percent less than last year’s level, the EIA’s weekly storage report showed on May 16.

To contact the reporter on this story: Christine Buurma in New York at cbuurma1@bloomberg.net;

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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