Weather takes the heat out of gas prices

Last week, natural gas prices sank by 12%, the worst weekly loss in a year, on forecasts of unusually warm weather.

US natural gas prices jumped to a two-year high of almost $4 per million British thermal units (mbtu) late last month. But the rally didn't last long. Last week prices sank by 12%, the worst weekly loss in a year, on forecasts of unusually warm weather. Around 50% of US homes use gas for heating, so winter weather is the main driver of demand.

Last month, freezing conditions meant that 600 billion cubic feet (bcf) of gas were taken out of storage in the three weeks in December, breaking a 20-year record, says Timothy Puko in Barron's. At this stage in the season, 400 bcf would be a typical figure for that timeframe.

Still, another cold spell could lead to a price spike, mopping up more of the gas glut, while structural changes that point to higher long-term prices are "just starting to show their effects", notes Puko. Environmental considerations have spurred a drive to phase out coal-fired power stations, with gas a cleaner alternative. Exports are on the rise, reflecting higher demand from abroad. Weather-related volatility aside, the long-term outlook appears bullish.

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