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Natural Gas Futures Surge After Inventories Fall Near 2-Year Low

Natural gas futures jumped to a three-month high in New York after a government report showed that U.S. stockpiles last week fell to the lowest level in almost two years.

Gas surged 3.6 percent, the biggest gain since Feb. 25, after an Energy Information Administration said inventories dropped 145 billion cubic feet last week to 1.938 trillion, the least since May 13, 2011. Analyst estimates compiled by Bloomberg showed an expected decline of 137 billion.

“The inventory withdrawal was surprisingly high,” said Gordy Elliott, a risk-management specialist at INTL FCStone Inc. in St. Louis Park, Minnesota. “We’re seeing a strong continuation of heating demand. If we can get past $3.85, we can rally to the $4 level.”

Natural gas for April delivery climbed 13.2 cents to settle at $3.812 per million British thermal units on the New York Mercantile Exchange, the highest closing price since Nov. 23. Volume was more than double the 100-day average at 2:41 p.m. Gas has climbed 14 percent this year.

The discount of April contracts to October, a gauge of summer demand for gas, narrowed 2.8 cents to 14.2 cents at 2:42 p.m., the smallest gap since Oct. 19. The discount of October to January contracts fell 2.6 cents to 31.1 cents.

Options Volatility

April $3.75 calls were the most active gas options in electronic trading. They rose 7.2 cents to 13.2 cents per million Btu on volume of 1,346 contracts as of 2:56 p.m. Calls accounted for 63 percent of options volume.

Implied volatility for at-the-money gas options expiring in April was 34.14 percent, up from 33.87 percent yesterday. May options volatility was 31.23 percent, up from 30.91 percent.

The stockpile decrease was almost twice the five-year average decline for the week of 74 billion cubic feet, department data show. A surplus to the five-year average fell to 11.4 percent from 14.8 percent the previous week. Supplies were 18.5 percent below year-earlier inventories, compared with 14.8 percent last week.

This week’s storage withdrawal signals “some further tightening of the supply/demand balance relative to the recent baseline,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said today in a note to clients. “Combined with the forecast for ongoing colder-than-normal temperatures, this ratchets up the pressure for prices to move higher in the near term.”

Seasonal Demand

Northern states will see below-normal temperatures through March 28, MDA Weather Services said. Gas futures have rallied 24 percent from a 2013 intraday low of $3.05 per million Btu on Jan. 2 as waves of unusually frigid weather spurred heating demand late in the heating season.

The low in Chicago on March 18 may be 22 degrees Fahrenheit (minus 6 Celsius), 10 below the usual reading, and two days later Boston may fall to 9 lower than usual at 23 degrees, according to AccuWeather Inc. in State College, Pennsylvania.

About 50 percent of U.S. households use gas for heating, according to the EIA, the Energy Department’s statistical arm. Gas demand typically slumps between the peak heating-demand season and before hot weather drives power demand to run air conditioners.

Marketed gas production will average a record 69.6 billion cubic feet a day this year, down from 70.02 billion estimated in February, the Energy Information Administration said in its monthly Short-Term Energy Outlook, released yesterday in Washington. Output will rise 0.7 percent from 2012.

Freezing Wells

Cold weather has reduced output during the winter as water produced with gas crystallizes and blocks flows from wells.

“As natural gas production in the United States shifts inland, well freeze-offs have become a greater supply disruption risk during the winter,” the EIA said in the report.

The boom in oil and natural gas production helped the U.S. cut its reliance on imported fuel. America met 84 percent of its energy needs in the first 11 months of last year, government data show. If the trend continued through 2012, it will be the highest level of self-sufficiency since 1991.

Output from U.S. nuclear plants fell 26 megawatts to 83,309 megawatts today, or 82 percent of capacity, the least since Nov. 30, according to U.S. Nuclear Regulatory Commission data compiled by Bloomberg. Production has fallen 13 percent from this year’s high reached on Feb. 1.

Reactor maintenance shutdowns, usually undertaken in the U.S. spring or fall, when energy use is lowest, may increase consumption of natural gas and coal to generate electricity.

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