THE WALL STREET JOURNAL

Natural Gas Rises as Investors Bet on a Bottom

Prices have been lingering at historic lows because of a glut in storage


By TIMOTHY PUKO / Updated April 7, 2016 3:56 p.m. ET


Natural-gas prices had one of their strongest surges of the year Thursday with investors betting
the glutted market has hit a bottom.


Prices have lingered at historic lows because of a glut in storage. The U.S. Energy Information
Administration said Thursday stockpiles grew another 12 billion cubic feet last week, a time of
year when stockpiles usually fall. They are now 54% larger than they usually are at this time of
year.


But gas futures were adding to gains despite the glut, with investors betting they could make big
gains from a market rebound, analysts said.


Supply appears to be falling from a record pace and consumption could be much higher than
usual this April, luring some bullish speculators into the market, analysts said.


Natural gas for May delivery settled up 10.7 cents, or 2.2%, at $1.911 a million British thermal
units on the New York Mercantile Exchange. It is the market’s largest daily percentage gain of
the year and largest dollar gain since Jan. 29.


Weather forecasts show colder-than-normal temperatures settling in to major Midwest and East
Coast heating markets through mid-April. That late season heating demand could make April’s
storage additions some of the lightest ever, said Teri Viswanath, managing director at consulting
firm PIRA Energy Group in New York.


“Based on the weather forecasts, we’re going to significantly reduce the surplus to the five-year
average in April,” said Kyle Cooper, managing director at Criterion Research LLC, a Houston
consulting firm. “It seems like that’s the primary driver right now.”


The summer could bring strong demand, too, according to MDA Weather Services in Maryland.
Its new summer outlook predicts the fifth-hottest summer since at least 1950, based on a 9.6%
increase in cooling degree days which is a measure of much hot temperatures are driving demand
for electricity to run air conditioners. The trend comes from a strong La Nina and warm Atlantic
Ocean waters bringing heat to the central and eastern U.S., MDA said.


Supply is also slowing, with Wednesday’s output the lowest of the year and Thursday’s output
likely to be about the same, according to analytics firm Platts Bentek. Now, at 71 billion cubic
feet a day, output is down 2.7% from the record high hit in February.


Many investors have been speculating that natural-gas producers will start massive supply cuts
soon because of a recent collapse in prices that took them to the lowest inflation-adjusted level in
its history of Nymex trading. Energy Aspects has said the recent pullback could be the first sign
that trend is starting.


“You’re looking at a lot of sidelined investors who are looking to get back in at a point where
they can benefit from the recovery,” Ms. Viswanath said.


However, many producers have said they plan to grow production this year by 2% to 15%,
despite big spending cuts, $22 billion among North American independent producers, according
to Energy Aspects’ totals.


Even though the number of active gas rigs is at its lowest number since at least the 1980s, well
costs have fallen sharply and producers have hundreds of wells they have drilled but left idled
and can now tap to keep supply coming.


Energy investment bank Tudor, Pickering, Holt & Co. cut its 2016 natural-gas price forecast
from $2.65 to $2.25/mmBtu because of weak winter demand that caused the current glut.


Citigroup had made a similar change Wednesday, cutting its forecast 16% to $2.10/mmBtu. Gas
producers can’t rely on power plants to start buying natural gas because they are already sitting
on a glut of unused coal, Citi said.


The banks did, however, predict 2016’s glut would lead to higher prices in 2017. Tudor,
Pickering said it increased its 2017 forecast 15 cents to $3.65/mmBtu largely because of “2016’s
underinvestment.”


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND
MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES
MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY
RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT
IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE
RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL
DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED
IN THE PRICE OF THE UNDERLYING FUTURES.