Natural gas futures jump over 1.5% despite mild weather forecasts

Investing.com - Natural gas futures were up for a second day on Monday, moving further away from last week’s ten-year low as some bargain buying and short covering provided support, though further downside was seen as mild spring temperatures were forecast across the eastern half of the U.S. in the coming weeks.

On the New York Mercantile Exchange, natural gas futures for delivery in April traded at USD2.365 per million British thermal units during U.S. morning trade, jumping 1.7%.       

It earlier rose by as much as 2.45% to trade at USD2.392 per million British thermal units, the highest since March 6.

Prices fell to USD2.208 per million British thermal units on Tuesday, March 13, the lowest since February 2002, amid forecasts for mild March weather and lingering concerns over record high U.S. inventory levels.

Prices moved higher for a second day on Monday as traders closed out bets on lower prices, a move known as covering a short position, while other investors were reluctant to bet that prices will drop further.

Also supporting prices, industry research group Baker Hughes said Friday that that the number of active rigs drilling for natural gas in the U.S. fell to a ten-year low of 663 last week.

It was the tenth consecutive weekly decline and helped reinforce expectations that low prices were finally forcing drillers to curb gas production.     

While the rig count is well below the 800 level some said was needed to slow record output, analysts said the decline has yet to be reflected in pipeline flows.

A recent Bernstein report said the gas-directed rig count would have to drop to about 600 before it would be comfortable forecasting flat to falling production, but some traders think that number is still too high.    

Despite the two-day gain in prices, natural gas traders expect the near-term downtrend to continue amid indications demand for the heating fuel will remain weak in the near-term.

With less than a week to go in the U.S. winter, the surplus of natural gas in inventory is continuing to grow, keeping gas prices on the defensive until summer cooling loads kick in.    

The U.S. National Weather Service six- to 10-day outlook issued on Sunday called for above or much-above-normal readings for more than the eastern two-thirds of the nation, capping off an abysmal heating season for the U.S. natural-gas market.

According to the National Oceanic and Atmospheric Administration, temperatures in the continental U.S. in December through February were the warmest since 2000.

The agency said that the number of heating-degree days, a measure of energy demand, was 11% below the 30-year average for the October to February period.

Without a drop in temperatures, analysts say that next week's report could show the first injection of natural gas for the year.

Early withdrawal estimates for next week’s storage data range from a build of 7 billion cubic feet to 16 billion cubic feet, compared to the five-year average decline for the week of 17 billion.

Last year, in the March 16 report, the EIA reported gas withdrawals of 20 billion cubic feet, followed by a 7 billion cubic feet injection the following week.

Some market analysts expect prices to drop even further and test USD2.00 per million British thermal units amid expectations U.S. gas inventories will end the winter at a record high 2.2 trillion cubic feet, well above the previous high of 2.148 trillion set in 1983.

Total U.S. natural gas storage stood at 2.369 trillion cubic feet as of last week, 45% above year-ago levels and 52% higher than the five-year average of 1.562 trillion cubic feet.

Natural gas prices have plunged almost 10% since the beginning of March and are down nearly 21% since the start of 2012 as market sentiment has been dominated by concerns over elevated U.S. storage levels and mild winter weather that has limited demand for the fuel.

Elsewhere on the NYMEX, light sweet crude oil futures for delivery in May rose 0.5% to trade at USD108.13 a barrel, while heating oil for April delivery dipped 0.25% to trade at USD3.274 per gallon.