U.S. Gas Market Faces Long-Awaited Test as Cold Spurs Demand

(Bloomberg) -- A polar blast across the eastern U.S. is proving to be a crucial test for the nation’s natural gas market: Can record demand spurred by the cold outweigh surging production from America’s shale basins, sparking a sustained rally?

Deliveries of the heating and power-plant fuel jumped to 143 billion cubic feet on New Year’s Day in the lower 48 states, PointLogic Energy data show. That tops the previous record reached four years ago during the “polar vortex,” which unleashed bone-chilling conditions across the Midwest and Northeast. Gas futures have surged in response, though they’re still trading at less than half the high they reached in 2014.

America’s increasing reliance on gas has stoked speculation that a frigid winter will drain the nation’s stockpiles -- already below normal for the time of year -- sending prices soaring. The U.S. is exporting more gas than ever, via pipeline to Mexico and on tankers sailing across the globe, and power plants are burning record amounts as coal generators and nuclear reactors shut amid competition from cheap shale supplies.

“The litmus test for the industry will be the withdrawals” from gas storage, said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami. “We haven’t seen this kind of demand coupled with incremental new supply.”

Gas futures for February delivery rose 9.7 cents to $3.05 per million British thermal units at 1:13 p.m. on the New York Mercantile Exchange after earlier climbing to $3.097, the highest since Dec. 4. Prices have jumped 19 percent from a 10-month low on Dec. 21.

Gas drillers also rallied: Range Resources Corp. gained 4.9 percent to $17.90 in New York, one of the best performers in the Standard & Poor’s 500 Index.

Though gas prices have climbed, they’re far from the levels above $6 per million Btu seen in 2014. New pipelines are shuttling gas from shale plays like the Marcellus in Pennsylvania and West Virginia -- America’s biggest reservoir of the fuel -- to major markets, helping to meet rising demand.

TransCanada Corp.’s Leach Xpress pipeline, which will transport up to 1.5 billion cubic feet a day of gas from Appalachia to consumers in Ohio, West Virginia and beyond, got approval to start up late last week. Energy Transfer Partner’s Rover line, with 3.25 billion cubic feet a day of capacity from Appalachia into the Midwest and Canada, began partial service late last year and is set to be fully operational by March.

“One saving grace is there are new pipelines out of Appalachia,” with the Leach Xpress starting up at the “perfect time” to meet winter heating demand, said John Kilduff, a founding partner at Again Capital LLC in New York.

Still, traders are monitoring the government’s weekly reports on gas inventories to see how quickly cold weather can deplete supplies. Stockpiles probably fell by 222 billion cubic feet last week, compared with the five-year average drop of 99 billion, based on the median of analyst estimates compiled by Bloomberg.

Gas production has dropped slightly amid the cold on so-called freeze-offs, or wells that have been shut because of liquids freezing inside pipelines, according to Shunondo Basu, an analyst and meteorologist at Bloomberg New Energy Finance in New York. Northeast dry gas output is down about 1.4 billion cubic feet a day to total 24.2 billion a day, BNEF data show.

New York’s LaGuardia and John F. Kennedy airports have set records while Chicago had its coldest New Year’s Day ever, according to the National Weather Service. Boston’s set to tie a 100-year-old record with seven days of high temperatures below 20 degrees, said Bill Simpson, a weather service meteorologist in Taunton, Massachusetts.

“The bulls are getting their best shot right now,” Kilduff said. “The demand intensity is higher because of this shift to natural gas. The impact on storage is going to be the most interesting.”

--With assistance from Ryan Collins and Brian K. Sullivan

To contact the reporter on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Christine Buurma

©2018 Bloomberg L.P.