Photographer: Daniel Acker/Bloomberg

U.S. Natural Gas Has Best Week of 2016 as Supply Glut Narrows

  • Increased power-plant deman seen cutting inventory gains
  • Short sellers probably driving the rally, IAF's Cooper says

U.S. natural gas futures had their best week of the year on signs that summer-like temperatures in the East will help trim a supply glut.

Above-normal temperatures across most of the lower 48 states will rise in the South at the start of May, stoking demand for the power-plant fuel to run air conditioners. Preliminary pipeline data shows that stockpiles may increase by about 55 billion cubic feet this week, “way lower” than the year-earlier gain of 84 billion, according to Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management.

A gas surplus to the five-year average has narrowed for two straight weeks from a four-year high on an unexpectedly chilly start to April.

“The apparent storage injections have dropped dramatically and have not been at the level that a lot of people expected,” said Cooper, based in Houston.

Natural gas futures for May delivery rose 7.2 cents, or 3.5 percent, to settle at $2.14 per million British thermal units on the New York Mercantile Exchange. The futures were up 13 percent for the week, up the most since the seven days ended Jan. 1. 

Short sellers covering their bearish bets appear to be driving the rally given the recent drop in total open interest in gas futures, Cooper said. Aggregate open interest fell 3.7 percent to a two-week low of 1.118 million contracts on Thursday from April 15, Nymex data show.

Futures extended gains after the government’s midday Global Forecast System showed cooler weather late next week in the Midwest to the East followed by an unusually warm start to May in the South, adding both heating and cooling demand, according to Commodity Weather Group LLC.

The high temperature in New York City on Friday was forecast to reach 80 degrees Fahrenheit (27 Celsius), 16 above normal, AccuWeather Inc. said. Washington’s reading on Tuesday may hit 82.

The cooling demand is coinciding with some loss in production in Texas because of flooding. The equivalent of 0.2 billion cubic feet a day of production went offline yesterday. Pipeline nominations show that half of that may be back on Friday, though the scheduled deliveries are not final, according to Bloomberg New Energy Finance.

“There was an impact yesterday,” Het Shah, a New York-based analyst with BNEF, said in an e-mail. “We believe the impact will be minimal and most production will return soon.”

Gas Stockpiles

Gas inventories totaled 2.484 trillion cubic feet on April 15, 48.5 percent above the five-year average, according to the U.S. Energy Information Administration. Inventories are on track to reach an all-time high of 4.112 trillion by the end of October after the contiguous states experienced an unusually warm winter and production rose to a record.

Output from shale deposits is poised to fall by 1.1 in May to 45.93 billion cubic feet a day from this month, which would be the biggest percentage decline since March 2013, government data show. The retreat is being led by drilling cuts at oil-rich deposits such as the Eagle Ford in Texas, though gas fields such as the Marcellus in the East are also making cuts.

“There may be a bullish argument for natural gas,” wrote Tim Evans, an energy analyst at Citi Futures Perspective in New York, but some of that may be based on a “more forward-looking assessment like a faith that a warmer-than-normal summer will help drain the substantial storage surplus.”

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