US gas futures leap after cold snap drives down stockpile
Gas rose as much as 4 per cent as MDA Weather Services predicted below-normal temperatures in north-central states this week, while Texas and the south-east will experience hotter than normal readings from April 15 to April 19. Unusually cold March weather pushed supplies below the five-year average for the first time since 2011 and prompted Goldman Sachs to raise its price estimate by 65¢ to an average $4.40 per million British thermal units.
"We have a little Friday surprise by Goldman," said John Woods, president of JJ Woods Associates and a New York Mercantile Exchange floor trader. "This market does have the potential to move upward. We have an extended period of cold weather and it has taken away the surplus we had."
Natural gas for May delivery rose 14.7¢, or 3.7 per cent, to $4.09 per million British thermal units on the exchange. Prices climbed 1.6 per cent last week in the seventh straight weekly increase, which is the longest such streak since October 2009.
"The cold weather in March means the 2012-13 winter will end up in line with historical averages, despite the mild weather in December," wrote Goldman Sachs analyst Johan Spetz.
The tightening supply-and-demand balance meant prices would have to move higher in the second half of the year to spur production growth after the summer, he said.
"We now expect prices will need to average $4.50 per million Btu in the second half of 2013 to bring on the production growth required to balance the market."
MDA forecasts show that unusually cold weather in parts of the midwest this week will shift westward by the middle of the month while the eastern half of the lower 48 states heats up.
The low temperature in Chicago by Friday may be 2 degrees, which is six below normal, according to AccuWeather.
Phil Flynn, senior market analyst at Price Futures Group in Chicago, said: "The fact that storage is below the five-year average, you are going to see prices go up."
US stockpiles fell by 94 billion cubic feet to 1.687 trillion cubic feet at the end of March, the Energy Information Administration said. Inventories typically start to increase from April through to October to prepare for the next heating season, the peak months for US gas consumption.
Mr Spetz estimated supplies at the end of October would peak at 3.65 trillion cubic feet, which EIA data shows would be the lowest level for the time of year since 2008.
Frequently Asked Questions about this Article…
A cold snap pushed US natural gas demand higher and helped erase a prior stockpile surplus, which tightened the supply-demand balance. Forecasters such as MDA Weather Services predicted below-normal temperatures in parts of the north-central US, and Goldman Sachs raised its gas price forecast—both factors that helped lift natural gas futures.
Natural gas for May delivery rose 14.7¢ (3.7%) to $4.09 per million British thermal units. Prices climbed 1.6% last week, marking a seventh straight weekly increase—the longest such streak since October 2009—indicating continued upward momentum in US natural gas futures.
The Energy Information Administration reported US stockpiles fell by 94 billion cubic feet to 1.687 trillion cubic feet at the end of March. That decline took inventories below the five-year average and matters because lower storage levels can increase price sensitivity to cold weather and raise the risk of price spikes.
Goldman Sachs raised its gas price forecast for the year (a 17% increase overall) and increased its short-term price estimate by 65¢ to an average $4.40 per million Btu. Goldman analysts said prices would likely need to average about $4.50 per million Btu in the second half of 2013 to encourage the production growth needed to balance the market.
Weather drives heating and cooling demand for natural gas. In this case, MDA forecast below-normal temperatures in parts of the midwest and north-central states—boosting demand—while Texas and the southeast were expected to be hotter than normal. Unusually cold weather in March pushed supplies below the five-year average, so follow short- and medium-term weather outlooks to gauge near-term price pressure.
Below‑average storage typically means tighter market balances, which can translate into higher prices and greater volatility if demand rises. As analysts in the article noted, when storage is under the five‑year average you’re more likely to see price increases, especially during unexpected cold snaps.
Inventories typically start to build from April through October as gas is injected into storage ahead of the next heating season. Investors should watch these injections because the level of inventories going into winter affects supply cushion, price outlooks, and the potential for winter price volatility.
Keep an eye on EIA weekly storage reports, weather forecasts (cold snaps or prolonged mild periods), analyst price forecasts (like Goldman Sachs’ updates), weekly futures price trends, and signs of production growth. Together these indicators help signal whether supply will tighten or loosen and how prices might move.
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