Natural Gas Futures Advance on Outlook for Inventory Deficit

Natural gas futures rose to the highest price in more than three months in New York on speculation that warm weather and declining production may widen a stockpile deficit.

Gas advanced 2.8 percent after the Energy Department reported that output in the lower 48 states slid 1.9 percent in February. The department said yesterday that gas inventories for the week ended April 22 totaled 1.685 trillion cubic feet, 0.6 percent below the five-year average.

“We had an inventory level that was supposed to be impenetrable,” said Phil Flynn, an analyst with PFGBest in Chicago. “We’ve had a few bullish stockpile reports, and people are wondering if there’s an issue with production.”

Natural gas for June delivery rose 12.7 cents to settle at $4.698 per million British thermal units on the New York Mercantile Exchange. The settlement price was the highest since Jan. 21. The futures climbed 6.5 percent this week, the third consecutive gain, and were up 7 percent for April.

Inventories were below the five-year average for the first time since the week ended Feb. 25. Stockpiles were 11 percent below levels a year earlier, the widest year-on-year deficit since Aug. 8, 2008, yesterday’s report showed.

Gas output in the lower 48 states fell to 65.49 billion cubic feet a day from a revised 66.78 billion, the government said today in its EIA-914 report. Much of the decline was caused by cold weather in Texas, New Mexico, Oklahoma and Wyoming, the department said.

Large Drop

“This was the biggest drop in over a year,” said Pax Saunders, an analyst with Gelber & Associates in Houston, in a note to clients today.

The EIA-914 report covers gas gross withdrawals, which include gas used for repressuring, quantities vented and flared, and non-hydrocarbon gas removed in treating or processing operations.

The number of rigs drilling for gas in the U.S. rose by four to 882 last week, the first increase in four weeks, according to data published today by Baker Hughes Inc.

Hot weather in the southern U.S. may boost air conditioning use, sparking demand for natural gas in power plants. Above- normal temperatures are likely in the region from May 9 through May 13, according to MDA EarthSat Weather in Rockville, Maryland.

The high temperature in El Paso, Texas, on May 12 may be 88 degrees Fahrenheit (31 Celsius), 3 above normal, according to AccuWeather Inc. in State College, Pennsylvania.

Power plants use 30 percent of the nation’s gas supplies, according to the Energy Department.

Nuclear Production

U.S. nuclear-power output rose from its lowest level in more than 10 years as Public Service Enterprise Group Inc. (PEG) boosted the Salem 1 reactor in New Jersey, the Nuclear Regulatory Commission said. Nuclear power plant shutdowns can boost demand for gas as a replacement fuel.

Power generation nationwide increased 994 megawatts, or 1.4 percent, from yesterday to 71,277 megawatts, or 70 percent of capacity, according to an NRC report today and data compiled by Bloomberg. Twenty-nine of the nation’s 104 reactors were offline.

“We attribute the bullish storage surprises primarily to nuclear power facility outages, which have led to a higher than expected call on gas-fired power generation,” analysts includingCameron Horwitz at Canaccord Genuity in Houston said in a note to clients today.

Gas futures volume in electronic trading on the Nymex was 275,927 as of 2:54 p.m., compared with the three-month average of 319,000. Volume was 412,862 yesterday. Open interest was 960,981 contracts. The three-month average open interest is 926,000.

The exchange has a one-business-day delay in reporting open interest and full volume data.

(Source: http://www.bloomberg.com/news/2010-12-08/natural-gas-rises-in-new-york-on-estimates-of-large-inventory-withdrawal.html)