Natural gas set to rise as supply erodes

Christine Buurma / Bloomberg News /

NEW YORK — 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, Bank of America 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 Btu 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 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.

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.

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 United States 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.

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.