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May natural gas surges as decline in production to meet demand boost

May naturalgas futures surged and posted a settlement back above $2/MMBtu for the first timesince early February on Thursday, April 7, amid speculative buying as market participantsshrugged off a bearish natural gas inventory report in favor of cold weather forecastsfor April. The contract hit a $2.024/MMBtu high before backing down to a finish10.7 cents higher at $2.018/MMBtu.

The marketquickly digested and ignored the latest natural gas storage report from the U.S.Energy Information Administration that showed a net 12-Bcf injection into natural gas inventories for the finalweek of the titular withdrawal season.

The injectionwas above consensus estimates and compared against the five-year average withdrawalof 19 Bcf and the year-ago injection of 6 Bcf, and brought total U.S. working gassupply to a fresh end-of-withdrawal-season record high of 2,480 Bcf, beating theprevious record of 2,473 Bcf set March 31, 2012. Stocks are 1,008 Bcf above theyear-ago level and 874 Bcf above the five-year average storage level of 1,606 Bcf.

Naturalgas producers are expected to continue to respond to the high level of supply enteringthe typical shoulder season with production decline already evidenced and more anticipated.

The EIAsaid in its March 31 Natural Gas Weekly Update, covering the review week to March30, that the total natural gas supply fell by 1.2%, with declines in most componentsof supply, including dry production, which fell by 0.4% week over week, 1.2% lessthan in the same week in 2015. The EIA's weekly report covering the review weekto April 6 was not yet available, but an additional week-on-week decline was expectedas producers are anticipated to be responding to the high level of natural gas ininventories entering into the shoulder season.

Althoughthe contraction in natural gas production is warranted by the hefty natural gassupply, the pullback will coincide with unseasonable cold weather in the major heat-consumingNortheast and Midwest markets in the coming weeks, prompting enough concern to drivethe heavy buying in natural gas futures despite the bearish inventory report.

"This[the 12-Bcf storage injection] may not be enough of a shock to offset the late-seasonheating demand due to the current forecast for colder than normal temperatures.Prices may be able to absorb the bearish storage surprise and still test higher,"Citi Futures analyst Tim Evans said following the release of the storage figure.

In fact,the latest weather forecasts supported sharp gains as the six- to 10-day outlookshows below average temperatures will grip the majority of the east including mostof the Northeast, the Mid-Atlantic, the bulk of the Southeast, the Midwest, andportions of the east-central and Gulf regions. Below-average readings will alsogrip a portion of the Southwest, while the balance of the country will see averageand above-average temperatures.

The eight-to 14-day outlook shows above-average temperatures replacing the average and below-averagetemperatures in the Northeast, portions of the Mid-Atlantic, Midwest, and portionsof the central U.S. and West, while mostly average temperatures span across thesouthern tier of the U.S. Breaking the pattern, South Florida will see above-averagetemperatures, and Arizona and portions of New Mexico, Utah, Nevada and Californiawill see the only below-average temperatures.

Day-ahead markets boosted as winter-likeweather returns

The winterthat never was is turning into a winter-like April with the cold weather supportinggains in day-ahead natural gas markets across the board.

Northeastmarkets posted significant gains as demand is anticipated to build as temperaturesfall back to below normal across the region. Algonquin Citygates trades shot about$1.25 higher on the session to an index around $3.70, while Iroquois-Waddingtonadded a smaller 5 cents to its prior range to an index around $2.15. Transmissionconstraints that plagued New England during times of heavy demand accounted forthe wide disparity in prices between the Algonquin hub and the Canadian border Iroquois-Waddingtondelivery location. Gains of more than 10 cents were reported at hubs in and aroundNew York City. Transco Zone 6 NY found an index near $1.75 and TETCO-M3 found itsindex around $1.70.

Gainsbetween 5 cents and 10 cents were reported at most delivery locations around thebalance of the country as cold weather fed into demand expectations. Henry Hub tradesaveraged around $1.95, Col Gulf Mainline averaged near $1.85, FGT Zone 3 found itsindex near $1.90 and Chicago averaged near $1.95. Waha saw its index pulled to near$1.80 with a smaller gain of less than 1 cent.

Acrossthe West, gains were capped below 5 cents amid relatively modest demand boosts.SoCal Border found an index around $1.80, The PG&E Gate index was pegged near$1.90 and Malin averaged near $1.75.

Market prices and included industrydata are current as of the time of publication and are subject to change. For moredetailed market data, including our power,naturalgas and coalindex prices, as well as forwardsand futures,visit our Commodities Pages. To view detailed EIA Weekly Natural Gas Storage data,go to our NaturalGas Storage Page.