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Natural Gas Settles Above $4 at 19-Month High on Cold Weather

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March 27 (Bloomberg) -- Natural gas futures settled above $4 per million British thermal units for the first time since 2011 on forecasts of colder-than-normal April weather that would increase fuel demand, widening a year-on-year inventory deficit.

Gas gained 1.9 percent after MDA Weather Services in Gaithersburg, Maryland, predicted below-normal temperatures in the Midwest from April 1 through April 10. Stockpiles slid 90 billion cubic feet last week, according to the median of 18 analyst estimates compiled by Bloomberg. Supplies gained 45 billion in the same week last year.

“The forecasts are colder than normal and we’re going to have a pretty bullish inventory report tomorrow,” said Dominick Chirichella, senior partner at the Energy Management Institute in New York. “Ending the season with stockpiles strongly below last year’s level is a tremendous accomplishment, considering where we started.”

Natural gas for May delivery rose 7.7 cents to settle at $4.068 per million British thermal units on the New York Mercantile Exchange, the highest settlement price since Aug. 11, 2011. Trading was 28 percent above the 100-day average at 2:59 p.m. The futures are up 21 percent this year. Gas last closed above $4 on Sept. 14, 2011.

The discount of May contracts to October narrowed 0.8 cent to 9.7 cents. The discount of October to January fell 0.9 cent to 28.5 cents.

May $3.50 puts were the most active gas options in electronic trading. They slipped 0.2 cent to 0.8 cent per million Btu on volume of 1,483 contracts as of 3:09 p.m. Puts accounted for 46 percent of options volume.

Options Volatility

Implied volatility for at-the-money gas options expiring in May was 31.70 percent at 3 p.m., up from 29.84 percent yesterday. June options volatility was 30.21 percent, up from 29.09 percent.

The low in Chicago on April 5 may be 29 degrees Fahrenheit (minus 2 Celsius), 9 lower than the usual reading, according to AccuWeather Inc. in State College, Pennsylvania. The low in Cincinnati may be 36 degrees, 3 less than average.

About 50 percent of U.S. households use gas for heating, according to the Energy Information Administration, the statistical arm of the Energy Department.

Gas inventories totaled 1.876 trillion cubic feet as of March 15, 21.1 percent below last year’s level, EIA data show. The year-on-year stockpile deficit was the widest since April 2008. Supplies were 9.5 percent above the five-year average.

Stockpiles reached a record 3.929 trillion cubic feet in November.

Gas Output

Marketed gas production will average an all-time high of 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 March 12 in Washington. Output will rise 0.7 percent from 2012, setting a record for a sixth straight year amid gains at shale deposits such as the Marcellus in the Northeast.

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 number of rigs drilling for gas in the U.S. fell by 13 to 418 last week, according to data from Baker Hughes Inc. in Houston. The total is down 3 percent this year.

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.

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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