April 26 (Bloomberg) -- U.S. natural gas for delivery this fall is trading at a record premium, signaling the fuel may be poised to rebound from its worst quarter in two years because of production cuts and rising demand from power plants.
Gas futures for delivery in October traded at an all-time high of 48.1 cents per million British thermal units above the May contract on April 11, when prices dropped below $2 per million British thermal units for the first time since 2002. The spread was 19.7 cents on Jan. 30. Near-month gas may rebound to $4 “relatively quickly,” Goldman Sachs Group Inc. said in an April 24 report.
Prices have tumbled 31% this year as the fourth- warmest winter on record crimped demand and output from shale formations increased. Energy companies including ConocoPhillips and Encana Corp. have responded with production cuts, reducing the chances that supplies will overwhelm storage before winter. Demand for gas from power plants will climb 16% in 2012, according to the Energy Department.
“We’re going to see production curtailments and an uptick in power demand this summer that will prevent us from reaching maximum storage capacity,” said Scott Hanold, an analyst at RBC Capital Markets in Minneapolis. “Short-term gas contracts can take a beating, but investors have a more constructive view of longer-term contracts.”
Natural gas for May delivery increased as much as 6.9 cents to $2.137 per million British thermal units in electronic trading today on the New York Mercantile Exchange, and traded at $2.12 per million Btu at 8:57 a.m. That follows yesterday’s gain of 4.7 percent, the biggest since Feb. 16, and brings this week’s increase to 10 percent. The spread between May and October futures was 40.7 cents.
Gas is the worst performer this year on the Standard & Poor’s GSCI Index of 24 commodities, falling 39% on a total-return basis. Prices on the Nymex dropped 29% in the first quarter, the biggest decline since the first three months of 2010.
The futures slid to $1.902 per million Btu on April 19, the lowest price since September 2001. Gas plunged as an inventory surplus to the five-year average reached 61% at the end of March, the biggest gap in six years. Marketed gas production will increase 4.5% this year to average 69.22 billion cubic feet a day from an all-time high last year, the Energy Department estimated April 10 in its Short-Term Energy Outlook.
Stockpiles totaled 2.512 trillion cubic feet in the week ended April 13, a record for that time of year, department data show. Barclays Plc and Bank of America Corp. predicted that inventory levels would approach or exceed 4.103 trillion cubic feet, the department’s estimate for physical storage capacity, by the end of October.
That outcome is less likely now that prices at 10-year lows have prompted energy companies to scale back production, according to Hanold, who was third among gas-price forecasters ranked by Bloomberg in the eight quarters ended March 31.
ConocoPhillips said April 23 that first-quarter output of oil and gas fell 3.8 percent.
Encana, Canada’s biggest natural-gas producer by volume, plans to reduce production by 600 million cubic feet a day, according to the Calgary-based company’s first-quarter earnings statement yesterday. The number of rigs drilling for gas has tumbled 22% this year, data from Baker Hughes Inc. in Houston show.
“There is a current weakness in market fundamentals due to an oversupply of natural gas and it is clear that a continued reduction of drilling activity will be required to restore market balance,” Encana said.