Natural Gas Futures Gain on Outlook for a Blast of Midwest Heat

Natural gas futures rose in New York on expectations that a blast of heat across the Midwest will boost demand from power plants.

Gas gained 0.5 percent after forecasts turned hotter from the Great Lakes to Montana, with temperatures expected to reach the low 90s Fahrenheit (low 30s Celsius) from Aug. 26 through Aug. 30, according to MDA Weather Services. Large cities along the East Coast may see seasonal weather next week, the Gaithersburg, Maryland-based company said.

“The market is pricing in a little bit of the cooling demand we are going to see in the next week and a half in the Midwest and the Northeast,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “It’ll probably force some of the shorts out of the market.”

Natural gas for September delivery rose 1.6 cents to settle at $3.46 per million British thermal units on the New York Mercantile Exchange. Volume was 25 percent below the 100-day average at 2:43 p.m. Gas is up 3.3 percent this year.

The discount of September to October futures widened 0.2 cent to 3.1 cents, the biggest such gap since Feb. 28. October gas traded 39.1 cents below the January contract, compared with 39.6 cents yesterday.

September $3.50 calls were the most active options in electronic trading. They were up 0.2 cent at 4.2 cents per million Btu on volume of 447 at 3:35 p.m. Calls accounted for 45 percent of trading volume. Implied volatility for at-the-money options expiring in October was 32.73 percent at 3:15 p.m., compared with 33.02 percent yesterday.

Price Rally

Gas prices have rebounded 11 percent since dropping to a five-month intraday low of $3.129 per million Btu on Aug. 8 as an unusually mild start to the month gave way to hot and humid weather from the Northeast into the West Coast.

“The recent rally may have run its course for now,” John Kilduff, partner at Again Capital LLC and editor of the Energy OverView newsletter in New York, wrote today. “The injection report tomorrow should finish off the rally, and selling is advised on any rally above $3.50.”

The high temperature in Chicago on Aug. 29 may be 91 degrees, 10 above normal, and the day New York may climb from seasonal temperatures to 89 degrees, 9 higher than the average, according to AccuWeather Inc. in State College, Pennsylvania.

Power Plants

Electricity generators account for 32 percent of U.S. gas demand, according to the Energy Information Administration, the Energy Department’s statistical arm.

Gas inventories probably expanded by 66 billion cubic feet last week, based on the median of 21 analyst estimates compiled by Bloomberg. The five-year average gain for the seven days is 56 billion, EIA data show. Supplies rose 43 billion the same time last year.

U.S. stockpiles totaled 3.006 trillion in the week ended Aug. 9, 1.5 percent above the five-year average for the period, the EIA reported last week. The deficit versus the historic norm widened from 0.7 percent the previous week while a deficit versus year-earlier levels narrowed to 7.7 percent from 9.2 percent.

Natural gas production in the lower-48 states was little changed in May as new wells began operating in the Northeast’s Marcellus shale formation while Wyoming production declined during scheduled maintenance, government data showed last month.

The EIA expects marketed gas output to climb for a sixth straight year to yield a record 69.89 billion cubic feet a day, up 1 percent from 2012, according to its Short-Term Energy Outlook released Aug. 6.

The U.S. met 87 percent of its own energy needs in the first four months of 2013, on pace to be the highest annual rate since 1985, according to EIA data.

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