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Natural gas prices spiked on Monday as the market gained confidence that the severe cold gripping the United States will persist longer than previously thought, driving up heating demand and taxing gas stockpiles.
Front-month Henry Hub natural gas futures for February rose more than 13 percent on Monday. The contract hit a session peak at $3.539 per million British thermal units, its highest level since Dec. 27.
The contract was last up 12.7 percent at $3.493 per mmBtu.
Updated forecasts show below-average temperatures persisting over the next two weeks, with the cold snap drifting eastward from the Midwest toward the East Coast. Traders were anticipating the cold would linger, but weather models available last week didn't give them the confidence to take long positions in natural gas futures heading into the weekend, according to Jacob Meisel, chief weather analyst at Bespoke Weather Services.
"The forecast has turned significantly colder," he said. "It's really the magnitude of the cold and the confidence in severity longer term that's changed over the weekend."
"There is surprisingly strong agreement even late in the week two forecast."
6-10 day forecast, source: National Weather Service
8-14 day forecast, source: National Weather Service
Natural gas prices have been falling since the middle of December, following a spike above $4 per mmBtu in the fall. Hotter-than-usual late summer temperatures and a surprisingly cold fall increased demand for cooling and heating last year, causing natural gas stockpiles to fall to their lowest level in over a decade.
Stockpile levels have improved after a warm second half of December, but a prolonged cold period will put renewed pressure on inventories and bid up gas prices, says Meisel. It's currently unlikely the cold will last long enough or be strong enough to push inventories toward record lows, but another move above $4 per mmBtu remains a risk.
"You would need to really sustain this cold through at least a third or half of February in order to get $4, even though we've made great progress in the five-year storage deficit over the last month," said Meisel. "I still wouldn't rule out $4 if the cold lasts long enough."
With natural gas inventories still 15 percent below the five-year average, investment bank Barclays sees room for higher prices even if weather normalizes during the rest of winter. Barclays is currently forecasting Henry Hub prices to average $3.51 per mmBtu in the first quarter and $2.92 per mmBtu for the full year.
"The market had seemingly written off a return to cold weather during the downturn of the last six weeks or so, and today's price action is a good reminder that there's still a lot of winter left," said Sam Phillips, vice president for global gas and energy at Barclays.