Natural Gas Advances as Hot U.S. Weather Boosts Demand for Power

Natural gas futures gained for a third day in New York as forecasts for hotter-than-normal weather signaled increased demand from power plants to run air conditioners.

Gas rose 2.5 percent as MDA Weather Services in Gaithersburg, Maryland, predicted above-normal temperatures across most of the lower 48 states from May 26 through June 4. The high in Dallas on June 3 may be 90 degrees Fahrenheit (32 Celsius), 3 more than usual, according to AccuWeather Inc. in State College, Pennsylvania.

“The forecasts for the beginning of June calling for some heat helped drive the prices higher,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The market catapulted back above $4 as some of the longs that got shaken out below $3.90 are piling back in.”

Natural gas for June delivery climbed 10.2 cents to $4.192 per million British thermal units on the New York Mercantile Exchange, the highest settlement price since May 1. Trading volume was 16 percent below the 100-day average at 2:35 p.m. Prices have risen 25 percent this year.

The discount of June to October futures, a measure of supply expectations for the summer, narrowed 1.2 cents to 7.6 cents.

Options Trading

July $3.50 puts were the most active options in electronic trading, falling 0.3 cent to 0.4 cent per million Btu on volume of 1,247 at 2:44 p.m. Puts accounted for 56 percent of trading volume.

Implied volatility for at-the-money options expiring in July was 31.60 percent at 2:30 p.m., down from 31.79 percent yesterday.

The forecast turned hotter for the next two weeks, especially from the Midwest to the East, with higher-than-usual readings in Texas, MDA said. The warm-up follows mostly mild weather seen in the eastern states during the first weeks of May, according to AccuWeather Inc. in State College, Pennsylvania.

“The abrupt change in the weather, with above-normal temperatures in the eastern half of the U.S., has triggered concerns that storage injections will fall off sharply,” said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York. “The market will likely respond by pushing the front of the curve up closer to the highs set in April.”

Inventory Outlook

Gas stockpiles probably expanded by 92 billion cubic feet in the week ended May 17, based on the median of seven analyst estimates compiled by Bloomberg. The five-year average gain for the seven days is 90 billion, according to the Energy Information Administration. Supplies rose by 75 billion a year earlier.

The EIA report, scheduled for release on May 23, “should take some wind out of the rally’s sails,” John Kilduff, partner at Again Capital LLC and editor of the Energy OverView newsletter in New York, wrote today. “That should be enough to remind folks that production remains at near-record levels, despite the low rig count.”

U.S. inventories totaled 1.964 trillion cubic feet in the week ended May 10, 4.1 percent below the five-year average for the period, EIA data show. The deficit to the historic norm narrowed from 5 percent the previous week while a deficit versus year-earlier levels fell to 26.1 percent from 28.3 percent.

Gas production will climb to an all-time high for the sixth straight year as increased output from shale deposits, such as the Marcellus in the Northeast and the Bakken in North Dakota, make up for a drop in conventional dry gas drilling, according to the EIA.

Marketed gas output will rise to 69.9 billion cubic feet a day in 2013 from 69.18 billion last year, the EIA said May 7 in its Short-Term Energy Outlook. The U.S. produced 84 percent of its own energy last year, the most since 1991, according to data from the EIA.