April 26 (Bloomberg) -- U.S. natural gas for delivery this fall is trading at a record premium to spot prices, signaling the fuel may be poised to rebound from its worst quarter in two years because of production cuts and rising demand from power plants.
Gas futures for delivery in October traded at an all-time high of 48.1 cents per million British thermal units above the May contract on April 11, when prices dropped below $2 per million British thermal units for the first time since 2002. The spread was 19.7 cents on Jan. 30. Near-month gas may rebound to $4 “relatively quickly,” Goldman Sachs Group Inc. said in an April 24 report.
Prices have tumbled 32 percent this year as the fourth-warmest winter on record crimped demand and output from shale formations increased. Energy companies including ConocoPhillips and Encana Corp. have responded with production cuts, reducing the chances that supplies will overwhelm storage before winter. Demand for gas from power plants will climb 16 percent in 2012, according to the Energy Department.
“We’re going to see production curtailments and an uptick in power demand this summer that will prevent us from reaching maximum storage capacity,” said Scott Hanold, an analyst at RBC Capital Markets in Minneapolis. “Short-term gas contracts can take a beating, but investors have a more constructive view of longer-term contracts.”
Natural gas for May delivery increased as much as 11.9 cents to $2.187 per million British thermal units today on the New York Mercantile Exchange and settled at $2.036 per million Btu. That follows yesterday’s gain of 4.7 percent, the biggest since Feb. 16, and brings this week’s increase to 5.7 percent. The spread between May and October futures was 42.1 cents.
Gas is the worst performer this year on the Standard & Poor’s GSCI Index of 24 commodities, falling 39 percent on a total-return basis. Prices on the Nymex dropped 29 percent in the first quarter, the biggest decline since the first three months of 2010.
The futures slid to $1.902 per million Btu on April 19, the lowest price since September 2001. Gas plunged as an inventory surplus to the five-year average reached 61 percent at the end of March, the biggest gap in six years. Marketed gas production will increase 4.5 percent this year to average 69.22 billion cubic feet a day from an all-time high last year, the Energy Department estimated April 10 in its Short-Term Energy Outlook.
Stockpiles totaled 2.512 trillion cubic feet in the week ended April 13, a record for that time of year, department data show. Barclays Plc and Bank of America Corp. predicted that inventory levels would approach or exceed 4.103 trillion cubic feet, the department’s estimate for physical storage capacity, by the end of October.
That outcome is less likely now that prices at 10-year lows have prompted energy companies to scale back production, according to Hanold, who was third among gas-price forecasters ranked by Bloomberg in the eight quarters ended March 31.
ConocoPhillips said April 23 that first-quarter output of oil and gas fell 3.8 percent.
Encana, Canada’s biggest natural-gas producer by volume, plans to reduce production by 600 million cubic feet a day, according to the Calgary-based company’s first-quarter earnings statement yesterday. The number of rigs drilling for gas has tumbled 22 percent this year, data from Baker Hughes Inc. in Houston show.
“There is a current weakness in market fundamentals due to an oversupply of natural gas and it is clear that a continued reduction of drilling activity will be required to restore market balance,” Encana said.
Natural gas may rebound as production growth slows and colder weather returns later in the year, Goldman Sachs said in its report this week. The 2011-2012 winter was the warmest since 2000 in the contiguous U.S., according to the National Climatic Data Center in Asheville, North Carolina.
About 51 percent of U.S. households use gas for heating, Energy Department data show.
Gas may drop below $1.80 if hot summer weather fails to materialize, Laurent Key, a gas analyst at Societe Generale SA in New York, said in an April 24 telephone interview.
The possibility of an El Nino, a warming of the mid-Pacific Ocean, has forecasters predicting lower temperatures across the U.S. this summer, which may mean less electricity will be needed to run air conditioners, according to Weather Services International in Andover, Massachusetts. About 35 percent of U.S. gas demand comes from power producers.
The El Nino pattern may also cause a below-average Atlantic storm season, with four hurricanes expected this year compared with 19 last year, according to researchers at Colorado State University who pioneered long-range Atlantic forecasting. About 6.4 percent of U.S. gas production comes from the Gulf of Mexico, where storms can disrupt supplies.
Falling gas prices are compelling power-plant operators to switch from burning higher-priced coal, Sabine Schels, head of fundamental commodities research at Bank of America in London, said in a telephone interview yesterday.
Gas costs for power plants slid to the equivalent of $1.3783 per million Btu less than coal on April 19, the biggest discount since coal futures began trading in 2001, according to data compiled by Bloomberg.
American Electric Power Co., the biggest U.S. producer of coal-fueled electricity, said April 20 that it used 62 percent more gas in the first quarter than a year earlier because of low prices.
Southern Co., once the largest U.S. consumer of coal, expects to generate 57 percent of its power from natural gas by 2020 if low prices and new environmental rules remain in effect, Thomas Fanning, Southern’s chairman and chief executive officer, said during an interview today.
“Slower production growth combined with a return to more normal winter weather next year will reduce the amount of price-induced coal-to-gas substitution required,” Jeffrey Currie, a New York-based analyst at Goldman, said in the report.
Gas prices will recover next year as normal winter weather, lower output growth and increasing demand bring storage back to usual levels by October 2013, according to Schels.
“We are close to a bottom, but equally we think any price recovery from there will be very long, drawn out and gradual,” Schels said. “We’re generating a humongous amount of coal-to-gas switching. You don’t need prices to go lower to generate more switching, unless coal prices drop.”
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