LONDON (Reuters) - U.S. natural gas prices have jumped to their highest in nine months as forecast cold weather across much of the country has reminded traders of the risks posed by low gas inventories going into winter.
Gas stocks have fallen well below the five-year range since the summer and are now at the lowest level for the time of year since 2003, according to data compiled by the U.S. Energy Information Administration.
Until the past few days, traders appeared unconcerned about low inventories because output is growing rapidly and the development of El Nino over the Pacific should lead to a warm winter over the northern part of the country.
But the much colder than normal temperatures forecast across much of the United States in the next fortnight are a reminder that El Niño is not the only influence on weather and heating demand.
Even if the coming winter proves warmer than average, there is still scope for extensive and extended cold periods that could put further pressure on gas stocks.
Natural gas futures prices for gas delivered in December have jumped to almost $3.57 per million British thermal units from just $3.19 on Oct. 30 and just $3.00 on Sept. 28.
Higher gas prices will encourage owners of gas-fired power generators to run them for fewer hours in the next few weeks to conserve scarce gas stocks, while coal-fired power plants are likely to run more.
Working gas stocks in underground storage were reported at 3,143 billion cubic feet on Oct. 26, some 17 percent lower than the 3,766 bcf at the same point last year (“Weekly natural gas storage report”, EIA, Nov. 1).
Heating demand has been running close to or slightly below the long-term seasonal average so far during the current heating season which started on July 1.
But the forecasts for much colder than normal weather over the next two weeks will push cumulative heating demand far above the seasonal norm.
Almost the entire United States, except California and southern Florida, as well as Alaska and Hawaii, will experience colder than normal temperatures in the middle of November.
Colder than normal temperatures are expected to persist over much of the country through at least the next two weeks, according to the U.S. government’s Climate Prediction Center.
The sudden cold contrasts with a warmer than normal outlook for much of the country especially across the northern states and Midwest over a one-month and three-month horizon.
The seasonal outlook is dominated by the background El Niño conditions, but does not mean there cannot be intense cold spells which will stretch gas inventories.
Many hedge fund managers have been buying futures and options linked to natural gas prices on the assumption that cold spells would force prices at least temporarily higher.
Hedge funds and other money managers were net buyers of derivatives equivalent to almost 1,500 bcf of natural gas in three weeks over late September and early October.
By Oct. 16, fund managers held more than five bullish long positions for every bearish short one, the most lopsided positioning for more than eight years.
The last three weeks have seen some small long liquidation and even smaller-scale short selling, according to regulatory data, but the hedge fund community is still very bullish.
Natural gas futures for December compared with April delivery, which were already in a small backwardation of around 26 cents per million British thermal units in late September, have surged to a premium of 84 cents.
The remainder of the heating season is likely to see more such spikes as spot prices and calendar spreads rise to limit power burn during cold snaps and eke out the relatively low level of inventories.
John Kemp is a Reuters market analyst. The views expressed are his own.
- Low U.S. gas market stocks tempered by mild El Niño forecast (Reuters, Oct. 19)
- U.S. power producers coal consumption falls to 35-year low (Reuters, Sept. 26)
- U.S. natural gas prices remain on defensive despite low stocks (Reuters, Sept. 19
Editing by Edmund Blair