Natural Gas Gains as Lower Gulf Output Expected to Cut Storage

By Reg Curren

Oct. 1 (Bloomberg) -- Natural gas futures rose almost 4 percent, the biggest gain in two weeks, on speculation production shutdowns in the Gulf of Mexico caused by two hurricanes will keep stockpiles from rising near the record levels expected in early September.

Analysts including George Hopley of Barclays Capital and Martin King of FirstEnergy Capital Corp. had predicted stockpiles would top 3.5 trillion cubic feet by the end of this month. Most analysts have pared that to about 3.4 trillion.

``Gas is offline, there's less LNG imports and winter is coming, so I'll not be surprised to see gas stay strong,'' said Peter Linder, an analyst and senior adviser at DeltaOne Energy Fund in Calgary.

Natural gas for November delivery gained 29 cents, or 3.9 percent, to settle at $7.728 per million British thermal units at 3:07 p.m. on the New York Mercantile Exchange. It was the biggest one-day gain since Sept. 17.

About 48 percent of the Gulf's daily output of 7.4 billion cubic feet was still offline today, according to the U.S. Minerals Management Service. Gulf offshore production accounts for about one-seventh of U.S. output.

Cumulative production losses from storms may exceed 240 billion cubic feet by the time all operations are restored, Hopley said in a report yesterday. Reduced demand after Ike and Gustav will result in a net deficit of 120 billion cubic feet.

Colorado State University forecasters said today they expect ``well-above-average hurricane activity'' this month. October will probably have three named storms, two of which will become hurricanes and one of those will be a ``major category'' storm, the forecasters said in a release on the university's Web site.

Price Bets

Speculators are betting on gas moving higher as cold weather approaches and the possibility supply will be constrained as seasonal usage surges, said Michael Rose, a director of trading at Angus Jackson Inc., a futures brokerage in Fort Lauderdale, Florida.

``They're saying natural gas has been beaten up more and it has come off its bottom,'' Rose said. ``We're close to the end of hurricane season and people are starting to talk about cold winters and demand will be sky high.''

Gas has been ``well supported'' at $7 per million Btu and prices have been depressed long enough, Rose said.

Crude oil declined 28 percent in the third quarter compared with a 44 percent drop for natural gas, according to data compiled by Bloomberg.

Price Expectation

``We spent the entire month of September consolidating'' around $7, said Brad Florer, a trader at Kottke Associates Inc. in Louisville, Kentucky. ``If you're an expectant bull for the balance of the year, you might be forced to start putting some stuff in the cart here, thinking the floor has been put in.''

The potential passage of a $700 billion government rescue for the financial industry, which the U.S. Senate will vote on late today, will offer some ``short-term steam into the economy, though it's hard to get behind this thing,'' said Florer. The measure would still need to pass in the House, which rejected the package on Sept. 29.

Stockpiles being rebuilt for the winter, when demand peaks, increased in the week ended Sept. 19 to 3.023 trillion cubic feet. Inventories were 5.1 percent below year-earlier amounts and 1.2 percent above the five-year average for the period, the Energy Department said Sept. 25.

``Here we are going into October and the next few weeks aren't typically big injections,'' said Chris Jarvis, president of Caprock Risk Management LLC in Hampton Falls, New Hampshire. ``Natural gas may only get to 3.3 trillion for winter.''

Supplies have, on average, started the winter at 3.327 trillion cubic feet.

Strong Demand

Stockpiles will be near that amount, though it provides less comfort than in the past because of a ``sea change in demand with the influx of people using gas as crude products went through the roof,'' Jarvis said.

On an energy equivalency basis, oil used to heat buildings and run power plants traded at a premium to gas in New York of about 50 percent, based on spot prices yesterday.

Gas in storage probably rose 78 billion cubic feet in the week ended Sept. 26, according to the median of 14 analyst estimates compiled by Bloomberg. The average change for the period is a gain of 72 billion.

The Energy Department is scheduled to release the next weekly storage report tomorrow.

To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net.