US natural gas futures climbed to a 12-week high after closing up almost 4 percent on Friday on midday forecasts calling for colder weather that is expected to boost heating demand over the next two weeks. Front-month gas futures on the New York Mercantile Exchange moved into technically oversold territory after closing up nine cents at $2.472 per million British thermal units.
That put the front-month up for a third week in a row, the longest weekly winning streak since July. During that time, the front-month has gained around 47 percent since hitting a 16-year low of $1.684 on December 18. Some analysts said gas futures would likely extend that rally with the weather expected to remain seasonably cold for the rest of January and the power sector continuing to burn near record amounts of gas to generate electricity.
In their latest estimates, meteorologists forecast temperatures will remain seasonably cold for the rest of January, according to data from Thomson Reuters Analytics. That is a change from a couple of weeks ago when they were calling for a warmer-than-normal January due to the warming effect of the El Nino weather pattern. For the rest of the winter, however, the forecasters were still calling for temperatures in February and March to be about 11 percent above normal.
While residential and commercial customers were using near-normal amounts of gas to keep homes and businesses warm, the power sector continued using near record amounts of gas because the fuel remains relatively cheap compared with coal. In 2015, the power sector consumed a record 26.4 bcf of gas per day on average, topping the previous high of 24.9 bcfd set in 2012, according to Thomson Reuters Analytics. Although it is early days for 2016, generators so far this year were using about 25.2 bcfd.
Traders said it made sense for power generators to burn gas as long as its premium over coal, which carries higher environmental and transport costs, is less than $1 per mmBtu. That premium has remained below $1 for 101 days in a row, the most since 2012. After producing record amounts of gas for the fifth year in a row in 2015, drillers were only pulling about 71.0 bcfd out of the ground so far this year due in part to flooding and well freeze-offs around the end of last year, according to Thomson Reuters Analytics. That compares with an average production of 73.4 bcfd in 2015.