Natural Gas Gains as Cold End to October May Spur Fuel Demand

Natural gas futures rose in New York for the first time in three days as the outlook for unusually cold weather heading into November signaled increased demand for the heating fuel.

Gas reversed earlier losses to gain 0.2 percent as midday government models showed a cold push in the eastern half of the U.S., with below-normal temperatures forecast from Oct. 23 through Nov. 1, according to Commodity Weather Group LLC. Government reports next week may show above-average stockpile gains for the first half of October, when the weather was mild.

“The back half of October looks a little chilly and if you extrapolate that into November, it’s a more bullish outlook,” said Kyle Cooper, director of research with IAF Advisors in Houston. “I was shocked by the weakness in light of the weather forecast. People don’t know how much supply is going to grow.”

Natural gas for November delivery rose 0.7 cent to settle at $3.764 per million British thermal units on the New York Mercantile Exchange after sliding to $3.685, the lowest intraday price since Oct. 10. Trading volume was 4.3 percent above the 100-day average at 2:44 p.m. Gas fell 0.3 percent this week, capping the third decline in four weeks, and has risen 12 percent this year.

The discount of November to December futures expanded for the first time in seven days, widening 0.4 cent to 13.3 cents. November gas traded 22.1 cents below the January contract, compared with 21.7 cents yesterday.

Gas Options

January $5.50 calls were the most active options in electronic trading. They were unchanged at 0.7 cent per million Btu on volume of 2,273 at 3:27 p.m. Calls accounted for 60 percent of trading volume. Implied volatility for November at-the-money options was 32.96 percent at 3:15 p.m., compared with 31.33 percent yesterday.

A surge of cold air next week “will be the strongest of the season so far, with sub-freezing low temperatures in the Midwest,” Matt Rogers, president of Commodity Weather Group in Bethesda, Maryland, said in a note to clients today.

Midday forecasts showed cooler changes to central states next week with the possibility of “massive polar air masses” driving into parts of the Deep South, Midwest and East 11 to 15 days from now, Rogers said.

The low temperature in Chicago on Oct. 25 will drop to 28 degrees Fahrenheit (minus 2 Celsius), 15 below normal, AccuWeather Inc. said on its website. Boston’s low will be 33 degrees, 11 lower than average. About 49 percent of U.S. households use gas for heating while 39 percent use electricity, according to the Energy Information Administration, the statistical arm of the Energy Department.

Winter Strip

Gas for the winter months, November through March, rose 0.7 cent to an average $3.917 per million Btu as of 3:31 p.m., according to Bloomberg fair-value prices.

“Investors want to keep the winter strip below $4 until we start to see winter heating demand,” said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York. “Considering the last few inventory reports surprised to the upside, there is a chance that next week’s inventory reports will show ample supplies on the market.”

The EIA said it will release two inventory reports next week. Data for the week ended Oct. 11, which was delayed from yesterday because of the government shutdown, will be issued Oct. 22 at 10:30 a.m. Data for this week will be released on Oct. 24 as the normal schedule is resumed.

Stockpile Estimates

U.S. inventories probably rose 77 billion cubic feet last week, based on the median of 17 analyst estimates compiled by Bloomberg. The five-year average gain for the period is 75 billion. Cooper said his early estimate for next week’s second inventory report is an increase of another 80 billion cubic feet, which would top the five-year average of 67 billion.

Gas stockpiles totaled 3.577 trillion cubic feet in the week ended Oct. 4, 1.6 percent above the five-year average for the week, data show from the EIA. Supply gains topped the averages in the three most recent reports.

The number of rigs drilling for gas rose by 3 this week to 372, according to Baker Hughes Inc. The rig count is down 14 percent this year.

Marketed gas output in the U.S. will average 70 billion cubic feet a day in 2013, up 1.2 percent from a record 69.18 billion last year, the EIA said in its Oct. 8 monthly Short-Term Energy Outlook.

The U.S. produced 87 percent of its own energy in the first six months of this year, on pace to be the highest annual rate since 1986, EIA data show.

Before it's here, it's on the Bloomberg Terminal.