U.S. Gas Stages Record Rally Since Mid-December on Cold Outlook

  • Futures rise 22 percent in all-time largest rally for period
  • Market `is reacting a little bit' to chance of cold in January

Christmas finally arrived for natural gas bulls.

Gas futures surged 22 percent from mid-month to Monday, the biggest rally ever for the period in New York Mercantile Exchange data going back to 1990. Prices rebounded from a 16-year low 11 days ago on speculation that colder weather in January will stoke demand and help ease a supply glut. Berkshire Hathaway Inc.’s Northern Natural Gas pipeline said Monday that storms are affecting transportation of the fuel in the Rockies, Oklahoma, West Texas and New Mexico.

Temperatures across most of the Midwest and East Coast will drop to seasonal levels Jan. 2 through Jan. 6, said Commodity Weather Group LLC. The low in Chicago on Jan. 4 will be 18 degrees Fahrenheit (minus 8 Celsius), 1 below average, AccuWeather Inc.’s website showed.

“The market is reacting a little bit to the prospect of lower temperatures in the next couple of weeks,” said Santiago Diaz, energy trading associate at FCStone Latin America LLC in Miami. “Traders that were short are probably covering those positions, maybe realizing some of the gains to report at the end of the year or to get some spending money.”

Gas futures for January delivery jumped 19.9 cents, or 9.8 percent, to $2.228 per million British thermal units on the Nymex, the highest close since Dec. 1 and the most since Oct. 29. Prices had dropped to $1.755 on Dec. 17, the lowest settlement since March 1999. January options expire Monday and the futures contracts for the month expire Tuesday. 

Options Trading

January $2.10 puts were the most active options in electronic trading, dropping 9.1 cents to 0.1 cent on volume of 1,304 at 3:08 p.m. while $2.20 calls for the same month rose 2.5 cents to 3 cents.

As the January options and futures contracts expire, “we may see some volatility at the front of the curve as books are squared in those instruments amid declining volumes and open interest,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said in a note to clients Monday.

Cold weather and storms are sweeping parts of the West and Midwest. The weather is lifting demand for the power-plant and heating fuel while also curtailing some supply. 

Gas Deliveries

Gas deliveries to customers climbed to 87 billion cubic feet on Monday, up 11 percent from a week earlier, PointLogic Energy data show. Consumption rose among power generators and residential and commercial users.

The storms in western Texas and New Mexico are affecting “supply deliverability,” Laura Demman, a spokeswoman for Northern, said Monday in a telephone interview.

Kinder Morgan Inc.’s El Paso Natural Gas pipeline issued a warning to customers that supply from Texas’ Permian Basin and New Mexico’s San Juan Basin were flowing below scheduled rates, according to a website notice. 

The spot price for gas delivered into El Paso’s pipeline system south of the Blanco, New Mexico, compressor station jumped 75 percent to $2.9219 on the Intercontinental Exchange. Gas there typically trades at a discount to the Henry Hub in Louisiana, the delivery point for New York futures. Instead, gas was being sold at Blanco for 84 cents more, the biggest premium to the benchmark since March 2014.

Winter Arrives

“It took two months, but winter is finally here and natural gas futures are moving along with them,” Aaron Calder, senior market analyst at Gelber & Associates in Houston, said in a note to clients Monday. “The demand situation still has a long way to go before the supply glut is dealt with, but this is an encouraging start.”

Equity investors aren’t buying the gas rally. While the front-month futures have rallied over the past two weeks, the forward curve has shown relatively little gain, with prices staying below $3 per million Btu until December 2017. Consol Energy Inc. shares dropped 10 percent to $7.785 at 3:11 p.m. in New York and Chesapeake Energy Corp. slumped 8.4 percent to $4.076.

Gas inventories probably fell by 42 billion cubic feet last week, based on the median of four analyst estimates compiled by Bloomberg. The five-year average decline for the period is a withdrawal of 95 billion. The U.S. Energy Information Administration is scheduled to release its next gas inventory report on Dec. 31.

Stockpiles totaled 3.814 trillion on Dec. 18, 12.1 percent higher than the five-year norm for the time of the year, EIA data show. That’s the biggest such supply surplus since March 2013.

The pace of storage withdrawals will pick up in coming weeks, jumping to triple-digit levels in the first two weeks of January, Evans said. “While cooler temperatures will mean larger net withdrawals from storage in the weeks ahead, we still expect the drain on working gas inventories to average somewhat below five-year average rates.”

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