US natural gas futures jump over five percent on colder weather

US natural gas futures ended up more than 5 percent on Friday in a short covering rally on forecasts for colder weather through the middle of February that should boost heating demand. After trading within a few cents of unchanged for eight straight days, front-month gas futures on the New York Mercantile Exchange closed up 11.6 cents, or 5.3 percent, at $2.298 per million British thermal units.
That put the front month up over 7 percent for the week for its second weekly gain in a row but down over 1 percent for the month. Both the US and European weather models called for cooler weather over the next two weeks. The US model called for colder than normal weather with the latest forecast at noon calling for even colder weather than earlier anticipated.
Forecasts for the rest of the winter, however, look much less cold due to the warming effect of the El Nino weather pattern with February expected to be about 13 percent warmer than normal and March 17 percent warmer than normal, according to long range forecasts on Thomson Reuters Analytics. Heating demand so far in January has been about 2 percent higher than normal. But despite a cold start to the new year, heating demand has averaged about 13 percent below normal so far this winter (November-March).
That weaker heating demand, however, was having little effect on gas usage, which has been normal for this time of year and was just about 1 percent less than the polar vortex winter of 2014-15. That is because the power sector continues to burn record amounts of gas to generate electricity since the fuel remains relatively cheap compared with coal, which carries higher environmental and transport costs.
So far this winter, the power sector has burned on average a record 24.8 billion cubic feet of gas per day, according to Thomson Reuters Analytics. That compares with 20.8 bcfd during the extreme cold last winter and the 30-year normal of 18.8 bcfd, according to Thomson Reuters Analytics. Traders have said it makes sense for generators to burn gas instead of coal when the gas premium over coal is less than $1 per mmBtu, as it has been since August and most of the rest of 2015.