January 22, 2014 5:58 pm

Biting cold sends US natgas futures to highs

US natural gas futures leapt to the highest level in two and a half years as biting cold returned to major cities.

A snow-blanketed New York was expected to feel highs of about -10C on Wednesday, while Minneapolis was set to remain below -14C all day. Below-normal temperatures were forecast to continue into next week across the central and eastern US, where gas is widely used to heat buildings and generate electricity.

Record daily gas demand and stymied output at frozen wells have sharply depleted inventories stored for winter. The US government reported underground stocks fell by a record 287bn cu ft to 2.53tn cu ft in the week ended January 10.

Since late October, when the 2013-14 winter heating season began, net withdrawals of 1.3tn cu ft have been the highest since the Energy Information Administration began gathering weekly data on inventory levels.

“Extreme weather events appear to be occurring more frequently than in the recent past and an extra-cold remainder of the winter would dramatically reduce end-of-season storage levels even further,” Macquarie said in a note.

Nymex February gas climbed as much as 4.9 per cent to $4.648 per million British thermal units on Wednesday, the highest level for a front-month futures contract since June 2011. Prices have gained 29 per cent since November.

The price difference between March and April-delivered futures – a trade popular among hedge funds – also rallied as some bet that consumers would need to scramble for supplies at the end of the heating season. March gas futures traded at a 23.7 cent per m Btu premium to April.

The moves in futures have looked tame in comparison with physical gas sold at certain northeastern hubs where demand outstrips pipeline capacity. At the Williams company’s Transco pipeline outside New York, gas for delivery on Wednesday soared as high as $140 per m Btu – or 30 times the futures price.

At the edge of Boston, gas sold at a high of $95 per m Btu on Spectra Energy’s Algonquin pipeline.

The EIA expects about 1.5tn cu ft in working stocks will remain by the end of March, the least since 2008. The agency’s latest weekly storage report is due early on Thursday.

Gas prices still face persistent pressure as drillers increase output in shale formations from Pennsylvania to Texas. Some analysts believe the rally will end once warmer weather returns. Prices tend to be higher in winter than in summer, when excess production is injected into underground storage.

“In line with what we have seen over the past five years, we believe 2014 will be another year where natural demand growth is fairly muted despite the low price environment,” Macquarie said.

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