US natural gas futures gained over 4 percent on Friday on colder weather forecasts expected to boost heating demand over the next two weeks and a slightly smaller-than-projected storage build. Front-month gas futures on the New York Mercantile Exchange closed up 10.1 cents at $2.361 per million British thermal units. Despite Friday's gain, the front-month ended down for the first week in three.
Traders have warned for weeks that futures were vulnerable to a short-covering rally if the weather suddenly turned colder because speculators could quickly exit big bearish bets. Over the past several weeks, hedge funds have built up net short positions on the NYMEX and Intercontinental Exchange to the highest levels in at least five years as they bet prices - recently at a three-year low - had further to fall.
Traders said prices for the rest of the winter and all of 2016 were depressed as storage levels were at all-time highs, producers continue to pump record amounts of gas out of the ground, and forecasts call for weaker-than-normal heating demand this winter due to warmer-than-normal weather expected from the El Nino weather pattern. The full-year 2016 strip was trading at $2.64 on the NYMEX, which could fall short of full-year 2015 depending on prices for the rest of November and December.
The first 10 months of 2015 averaged $2.74, the least since 2012, while the first 13 days of November have averaged $2.05, which would be the lowest for that month since 1995. The US Energy Information Administration said utilities injected 49 billion cubic feet of gas into storage in the week ended November 6, boosting inventories to a record high. That compares with an increase of 52 bcf in the prior week, 47 bcf in the same week a year ago and a five-year average of 23 bcf.
Both the US and European weather models forecast the weather would cool over the next two weeks. The latest US model, however, forecast temperatures would be colder than normal through late November, while the European model continued to point to higher-than-normal temperatures during that time.