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Natural Gas Rises to Nearly Two-Year High

Cooler forecasts continue raising expectations for demand

Written by Timothy Puko

Click HERE to Read the Article by the Publisher.

Natural-gas prices pushed a three-week rally to a new high Monday as cooler forecasts continue raising expectations for demand.

Natural gas for January delivery settled up 21.8 cents, or 6.3%, at $3.654 a million British thermal units on the New York Mercantile Exchange. Natural gas has surged nearly 40% since Nov. 11, sending gas to its highest prices since December 2014.

After a historically warm autumn, new forecasts show below-average temperatures spreading across most of the country. About half of all U.S. homes use natural gas for heat, making winter weather typically the market’s biggest driver for demand and often leading to winter price spikes.

Some have grown much colder than they had been about three weeks ago, changing demand expectations from bearish to bullish, said Zane Curry, a gas analyst at Mobius Risk Group in Houston. That has been forcing bearish traders to close out bets once prices rebounded above $3/mmBtu, accelerating the rally, he added.

“Everything switched to colder,” said Scott Shelton, broker at ICAPPLC. “It’s going up crazy,” especially in the Northeast.

MDA Weather Services in Maryland forecasts below-normal temperatures over basically the entire country but parts of the Southwest and Florida deep into the third week of December. While some of the temperatures aren’t that far below normal, many say the natural-gas market has changed enough that even a normal winter could be enough to drain bloated stockpiles and send prices higher.

Natural-gas producers trimmed the number of active drilling rigs heading into this winter to a record low in the 29-year history of the Baker Hughes rig count. A generation of coal-fired power plants is also closing, and electricity companies are burning a record amount of gas as they replace coal. Exports are rising, too, and with all that demand, there just isn’t enough drilling to keep supplies as high as they have been in the past year, analysts said.

Traders have been thinking of all those factors in sending prices up throughout the spring and summer. Now that normal winter weather is back in the forecast, it has eased the fears that caused prices to dip during a warm start to autumn.

“The trader’s mind-set,” said Peter Donovan, broker for Liquidity Energy in New York, “is that normal is now bullish.”

A lot of the changes have happened in the Northeast. Drilling in the Northern Appalachia basin, now one of the biggest gas fields in the world, has declined in recent years. But power grids in the same region and up through New England have become more reliant on gas.

Prices at gas hubs throughout that region have gone up by half or even doubled during the rally. That rise is outpacing futures prices at the benchmark Henry Hub in Louisiana, a common trend as winter demand picks in the north.

Prices on the Algonquin pipeline going into Boston were up $1.40 today alone, selling at a $6.25 premium over Nymex January futures, according to ICAP. That premium demonstrates how vulnerable New England and maybe other parts of the country at large can be to price spikes when cold spells drive demand for gas to heat buildings and fuel power plants at the same time.

“New England is fragile and volatile. New York sits somewhere in between,” said John Borruso, director of natural-gas trading at Consolidated Edison Inc.’s ConEdison Energy. The Mid-Atlantic region “is in a much better position…but you will still have your small constraints.”

Power prices have already been shooting up because of the gas rally, he added. And soon—if not already with gas futures above $3.50/mmBtu — power producers may burn more coal because gas has become more expensive, Mr. Borruso said. Clients in power generation have become more interested in hedging prices in recent weeks to lock in gas supply before prices get higher and to lock in power prices at the better margins that come from higher gas prices, he said.

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Written by Timothy Puko

Click HERE to Read the Article by the Publisher.