Natural gas prices flare up to 2-year high on cold weather, lower supply

Natural gas futures surged to the highest price in two years on expectations a blast of cold air next month will boost demand as stockpiles decline.

The January natural gas futures contract gained 4.5 percent to settle at $3.930 per million British thermal units, the highest since December 2014. The contract expired Wednesday afternoon, and the new front-month contract for February was also up sharply, at $3.89 per mmBtus.

Traders said natural gas futures also moved higher on expectations for a big drawdown in supply for a second week, when the government releases data at 10:30 a.m. ET Thursday. The Energy Information Administration is expected to report that storage shrank by about 220 billion cubic feet of gas for the week ended Dec. 23.

That would mean that gas in storage — at an estimated 3.375 trillion cubic feet — would be more than 10 percent below last year's level and 1.8 percent under the five-year average for last week, according to Dow Jones.

Natural gas has gained 11 percent in three sessions and is up 68 percent for the year. It hit a low of $1.61 per mmBtus in March.

"We're up 65 cents in less than two weeks, all on that call for the return of colder weather. I think the market might have gotten ahead of itself," said Gene McGillian, manager of market research at Tradition Energy.

John Kilduff of Again Capital said the market got a push from the latest forecast from the government that showed colder temperatures for most of the country in January.

"I think it has to be characterized as normalized winter conditions right now. What we're really kind of witnessing in the market is throughout this past year, there's a been a theme in the market. We've seen stronger demand from a number of sources — power plants turning from coal to gas. You saw the buildup of exports, both the Mexican pipeline and LNG exports. That created an underpinnning for a stronger environment, and now we're seeing the return of weather demand, and the market has seen a really strong bid," said McGillian.