Natural Gas Extends Scorching Rally on U.S. Supply Worries

(Bloomberg) -- Natural gas futures extended a massive rally in the U.S. as growing fears of a global supply crunch this winter drove speculative buying. 

Gas for October delivery surged as much as 10% and surpassed $6 per million British thermal units for the first time in seven years before paring gains. The expiration of the October futures contract on Tuesday added fuel to the rally as traders closed out bearish positions ahead of the colder months.

“It seems that all the shorts that needed to get out, are now out,” said Dennis Kissler, a senior vice president at Bok Financial Securities. The trader said he “wouldn’t feel comfortable” holding $6 gas through October and November without any major weather events, though any correction in prices should continue to attract buyers “until the winter threat is over.”

Prices for the heating and power-generation fuel are skyrocketing globally amid mounting concern that inventories won’t be able to meet demand in the northern hemisphere this winter. Supplies are particularly tight in Europe and Asia, but the U.S. is also facing potential constraints as exports rise and gas producers keep a lid on output in response to pressure from investors to reduce debt and boost share buybacks. 

“We’ve had a lot more spec buyers coming in,” Gary Cunningham, director of market research at Tradition Energy, said in an interview. He added that $9 and $10 options for January and February are trading actively and at a big premium, suggesting the market has still upside even though the supply-demand balance doesn’t justify prices at those levels. 

The so-called widowmaker premium for gas delivered in March versus April -- essentially a bet on how tight supplies of the fuel will be at end of winter -- has climbed to $1.458, the highest for this time of year since 2005.

Energy prices are also surging in Europe, with Dutch front-month gas futures climbing as much as 12% Tuesday.

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