Dow Jones Natural Gas - Late Day Rally As Cold Weather Boosts Buying

DJ Natural-Gas Prices Post Late Rally as Cold Weather Boosts Buying

  By Timothy Puko


  Natural-gas prices rallied late Tuesday as a frigid winter front boosts short-term hopes for increased demand.

  A cold front has sent temperatures plunging below normal in the Midwest and Northeast. Record production kept prices
in check through the fall, but the arrival of the long-awaited cold did finally push prices off a two-year low about an
hour before the market closed.

  Natural gas for February delivery settled up 5.6 cents, or 1.9%, at $2.938 a million British thermal units on the New
York Mercantile Exchange. Prices had fallen as far as $2.811/mmBtu before the turnaround, following a pattern of
volatile trading that has peaked since late December.

  "Without a doubt" it was the cold forecast that encouraged buyers, said Peter Donovan, broker for Liquidity Energy in
New York. "At the very least it's prevented it from falling further."

  Mr. Donovan and others worried that the market's overarching sentiment is still bearish, despite the arrival of the
winter season for peak demand. Prices had fallen in 10 of the past 14 trading sessions through Monday and are still
down nearly 35% from their recent peak in mid-November. The closing price is less than 2% above the lowest settlement
since September 2012.

  Investors have been betting prices will stay low because producers are pumping a record amount of natural gas, far
more than what is likely to be used even in an unusually cold winter. The extra gas will wind up in storage, ensuring
that supplies will remain ample during periods of peak demand and reducing the incentive to make bullish bets, traders
say.

  This time last year, prices were climbing toward an eventual peak above $6/mmBtu as a historic polar front sparked
record gas demand.

  "Phenomenal" production growth is the reason similar fears aren't surfacing with the return of cold weather this
year, Citigroup Inc. said in a note. Production grew by about 3 billion cubic feet a day in the last four months of
2014, and December production outpaced most analysts' expectations by 1 bcf a day or more.

  Gas stockpiles are on pace to exceed storage capacity by October, a development that would cause prices to fall
sharply, Citi said. The bank cut its price outlook for the next two years by nearly 30%, predicting an average of
$2.70/mmBtu in 2015, down from $3 in an earlier forecast.

  To avoid filling storage, gas producers have to keep cutting prices to entice power generators to switch to gas fuel
instead of coal. But coal prices are also falling, with some Appalachian futures now lower than $50 a ton and Illinois
basin prices lower than $40, according to SNL Energy, a research firm.

  "It looks like the worst-case scenario," said Teri Viswanath, a strategist at BNP Paribas SA in New York. She
compared it to 2012, when a similar scenario pushed natural-gas prices below $2/mmBtu.

  Even in 2012, it took a year for producers to slow down, Citi said. Citi predicts cutbacks are likely to take as long
to have an effect this year, leading to a "war of attrition" among producers to rebalance the market.

  "Basically you get a perfect competition and you have oversupply," Citi Research strategist Anthony Yuen said. "You
have to correct it, and until then, this chronic oversupply will just continue."

  The bank expects growth to continue through 2015 at a comparable rate to last year, more than 4 billion cubic feet a
day. Producers are reluctant to take the risk of lost revenue if they are the first to cut back, and even when they do
cut their spending, efficiency gains keep production growing.


  Write to Timothy Puko at tim.puko@wsj.com


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  (END) Dow Jones Newswires

  January 06, 2015 14:52 ET (19:52 GMT)

  Copyright (c) 2015 Dow Jones & Company, Inc.

010615 19:52 -- GMT
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