A Hot Summer Promises to Send Natural Gas Prices Soaring

Natural gas futures rose to the highest settlement price in almost three weeks on Monday after weather forecasts indicated that above-normal temperatures would increase the use of air conditioning, and therefore boost demand for the fuel. Prices strengthened further after government data showed that natural gas inventories increased less-than-expected in the week ended May 17, limiting the availability of the fuel.

The Energy Information Administration reported Thursday that natural gas stockpiles rose 89 billion cubic feet to a total of 2.053 trillion cubic feet, slightly below analysts’ expectations for a 92-billion cubic feet increase. Supplies were 24.9 percent below year-earlier inventories, compared with 26.1 percent in the previous week.

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But, as Prestige Economics president Jason Schenker told Bloomberg, this “injection is light but it’s not a game-changer.” There are “already upward-price-pressure dynamics in the market, given the deficit of inventories in place and the recent LNG announcement,” he added.

On May 17, the federal government conditionally approved the Freeport LNG liquefied natural gas export project in Texas, sending gas futures for June delivery up 3.5 cents to $4.09 per million British thermal units, the highest settlement price since May 1. The Freeport project was the second to receive approval from the Energy Department to export up to 1.4 billion cubic feet per day to countries that do not have free-trade agreements with the United States. The Freeport development — which is partly owned by ConocoPhillips (NYSE:COP), Dow Chemical (NYSE:DOW), and Osaka Gas — must still win approval from the Federal Energy Regulatory Commission. Cheniere Energy’s (NYSEMKT:LNG) Sabine Pass terminal in Louisiana is the only project that has full government approval to export LNG.

Just after the natural gas report was released Thursday morning, natural gas increased 3.9 cents, or 0.9 percent, to $4.225 per million British thermal units on the New York Mercantile Exchange. Prices have climbed 26 percent so far this year and 7.5 percent since May 16, the day before the Energy Department approved the Freeport export project.

Thanks to the boom in gas production from shale formations, the EIA has estimated that U.S.-marketed production in 2013 will set a record for the sixth straight year, increasing 1 percent to 69.9 billion cubic feet per day, according to the May 7 Short-Term Energy Outlook.

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Gas supplies have been particularly affected by recent weather. “We really haven’t had a shoulder season,” Price Futures Group market analyst Phil Flynn told Bloomberg. “We’ve had either cold weather or very warm weather and demand expectations are continuing to rise.” Above-normal temperatures will spread through most of the lower 48 states from June 2 through June 6, according to the Commodity Weather Group. The high in New York on June 3 could reach 88 degrees Fahrenheit, which is 12 degrees higher than the usual reading. As a result, gas consumption will spike this summer, as high temperatures prompt increased air conditioning use and higher prices.

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