Natural gas-switching cutting glut

Natural gas prices are poised for a third straight quarter of gains as U.S. power plants erode a supply glut by switching from coal at an unprecedented pace.

Gas may reach $4 per million British thermal units for the first time since September 2011 as winter heating demand picks up after mild weather a year ago, according to Mizuho Securities USA Inc., Bank of America Corp. and Tudor, Pickering, Holt & Co. Prices have jumped 8.7 percent to $3.488 since July as electricity generators used record amounts of the fuel.

A production boom that’s put the nation on course for energy independence drove gas to below $2 per million British thermal units in April for the first time in 10 years, encouraging power plants to buy the fuel instead of coal. Gas jumped 18 percent July through September as record heat in the lower 48 states stoked air-conditioning use. The market surged 33 percent in the previous three months.

“Now that we’ve blown through $3, we could rally toward $4, assuming we have a good winter on our hands,” Bob Yawger, director of the futures division at Mizuho, said in an interview in New York.

Gas futures gained 12.9 cents, or 3.7 percent, to $3.604 per million Btu on the New York Mercantile Exchange Thursday, the highest settlement since Dec. 1. Prices have rebounded 89 percent from the 10-year low of $1.902 on April 19. The futures last rose for three consecutive quarters in 2009.

Gas may exceed $4 “in periods of temporary tightness,” Sabine Schels, a commodity strategist at Bank of America in London, wrote in an Oct. 8 report.

The gas market “rebalanced quickly this summer, reducing the glut caused by overproduction and depressed winter demand. Stocks have built below the seasonal norm, alleviating concerns about storage containment,” she wrote.

Natural gas may reach $5 per million Btu in the first half of 2013 on elevated demand and improved economics, said Hussein Allidina, head of commodities research at Morgan Stanley, in a note to clients today.

Gas may average $4.20 between November and March, assuming normal weather, Allidina said.

Gas demand from power plants rose 16 percent in July from a year earlier and may show a 14 percent year-on-year gain this quarter, according to the Energy Department. Stockpiles of the fuel may climb as high as 3.903 trillion cubic feet before falling temperatures begin to boost demand, 7.9 percent below storage limits, department data show.

Inventories rose to 3.653 trillion cubic feet in the week ended Sept. 28, 8.3 percent above five-year average supplies for the period, according to the department. The surplus has declined from a six-year high of 61 percent on March 30.

Storage capacity in the lower 48 states was 4.239 trillion cubic feet in April, up from 4.103 trillion a year earlier, as space was added at some facilities and new sites came into service, according to the Energy Department.

“The fact that we haven’t approached storage capacity has been a license to take prices higher,” said David Pursell, a managing director at Tudor Pickering in Houston. “Production has been trying to plateau and there’s a lot more demand in the power sector.”

Gas consumed to generate electricity surged as prices hovered near 10-year seasonal lows. Gas-fired power plants accounted for 34 percent of electricity output in July, up from 29 percent a year earlier, the department said Sept. 24 in its Electric Power Monthly report. Coal’s share fell to 39 percent from 42 percent.

Gas demand from power plants may total 21.6 billion cubic feet a day in the fourth quarter, up 14 percent from 18.9 billion a year earlier, according to the department. Demand in 2012 will rise to 25.36 billion cubic feet a day, the highest for electricity generators in data going back to 1993.

Production of the fuel may rise 0.5 percent in 2013, the smallest increase in eight consecutive annual gains, according to Energy Department estimates.

The boom in oil and natural gas output helped the U.S. cut its reliance on imported fuel. America met 83 percent of its energy needs in the first six months of the year, department data show. If the trend goes on through 2012, it will be the highest level of self-sufficiency since 1991.

Producers slowed output as gas slid following the warmest winter since 2000. The number of rigs drilling for natural gas tumbled 46 percent this year through Sept. 28 to 435, the lowest level since June 1999, according to data from Baker Hughes Inc. in Houston.

“We expect 2013 to be a better year for the gas market with sub-$3 gas likely fading in the rearview mirror,” Pearce Hammond, a managing director at Simmons & Co. International in Houston, said in a note to clients Sept. 27. “While we estimate November 2012 gas storage to reach a record level of 3.9 to 3.95 trillion cubic feet, the worst appears to be behind us on the gas storage surplus.”

This winter will probably bring a boost to heating fuels compared with last year and leave above-normal snowfall from Massachusetts to Alabama, according to AccuWeather Inc.

Last winter was the fourth-warmest on record for the lower 48 states, according to the National Climatic Data Center.

The coldest part of the winter will probably be in February, with slightly warmer-than-average weather in December that may bring the entire season near normal, Paul Pastelok, long-range forecaster for AccuWeather in State College, Pennsylvania, said in an Oct. 2 phone interview.

“Even with the warmer risks considered, it would be difficult to repeat last winter’s record warmth,” Travis Hartman, a meteorologist at MDA EarthSat Weather in Gaithersburg, Maryland, said in an Oct. 1 forecast.

Higher demand and a slowdown in production may send gas to $4 even as shale output leaves inventories at an end-of-season record, Pursell said. Above $4, utilities may begin to switch back to coal, capping gas prices near that level, he said.