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Natural-Gas Stockpiles at a Low
Higher demand during the summer air-conditioning season, together with supplies
depleted by a brutal winter, should boost prices.


By Mary de Wet / June 14, 2014 1:24 a.m. ET

 

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Natural-gas prices are due to get more than the usual summertime boost.


That's because the U.S. has a big hole to fill in its stockpiles.


Natural gas is most in demand in summer, when utilities use the gas to generate electricity
to meet demand for air conditioning, and in winter, when the gas is burned to heat homes.
Last winter brought freezing temperatures to the U.S., and demand for the fuel ran
stockpiles down to the lowest level in 11 years. The cold weather also continued for longer,
reaching into early May. That has cut into the time producers have had to rebuild stockpiles.
April and May are crucial for replenishment; Deutsche Bank says about 47% of the gas
added to storage over the summer is done in the second quarter.


Natural-gas investors are betting that stockpiles won't reach adequate levels before next
winter, and they're buying gas now in anticipation of even higher prices ahead.


The Energy Information Administration expects 3.424 trillion cubic feet of gas to be in
storage by the end of October, down 9.4% from last year. Some analysts say it will be tough
to reach that level. "Since the market has already 'lost' six weeks out of this key injection
period, any demand or supply adjustment to achieve more rapid injections [of gas into
storage]…will need to be correspondingly more heroic," says Michael Hsueh, a strategist at
Deutsche Bank, in a recent note.


ADDITIONS TO GAS IN storage have begun to pick up. Producers recently added 119
billion cubic feet of supplies, the largest weekly increase in five years. But that's unlikely to
continue for much longer. Above-average temperatures predicted for late June would
increase demand for natural gas and divert supplies away from storage.


"Eventually, summer will arrive, and injections will be unable to continue this torrid pace,"
says Aaron Calder, senior market analyst at energy-consulting firm Gelber & Associates, in
a note. "The prospect of possible hot weather and smaller injections are keeping bullish
traders interested."


Natural gas for July delivery has gained 4.3% this month, ending Friday at $4.7390 a million
British thermal units.


As prices rise, power utilities that can burn either gas or coal will switch to coal. Bank of
America Merrill Lynch says the shift to Appalachian coal is significant when gas prices trade
above $4.70/MMBtu.


But Calder says many power plants have already made the switch. If a heat wave hits, the
utilities would need to burn gas, as well. "The question is…how much cooling demand will
we have to get before we start to use natural gas?" Calder says.


Any increase in natural-gas demand would make it that much harder for producers to refill
stockpiles. Deutsche Bank lowered its forecast for stockpiles to 3.368 trillion cubic feet by
Nov. 7 and says that amount could be closer to three trillion cubic feet if the summer is
hotter than usual.


"It could well be that the market will remain comfortable about entering winter with the
smallest amount of storage gas since 2005," Hsueh says. "However, the cumulative 19%
demand growth since 2005 combined with the ever-present risk of colder-than-normal
weather would argue otherwise."


MARY DE WET is an editor with The Wall Street Journal's energy and commodity markets team.
E-mail: editors@barrons.com


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