Colder-than-normal weather in many parts of the U.S. is lighting a fire under natural-gas prices.

Natural-gas prices rose above $4 a million British thermal units during intraday trading on Thursday and are up 73% from a year ago.

After watching prices of the heating fuel fall for more than four years, some commodities traders are getting bullish on na…tural gas. A chilly start to spring brought natural-gas stockpiles nationwide closer in line with average levels for this time of year. Further stoking the rally, traders and investors said, are signs that the boom in U.S. gas output is slowing, which could trim supplies even more.

When natural gas was languishing below $2 last year, the lowest price in a decade, some analysts expected prices to go even lower because companies were producing so much that a supply glut resulted. Now, there is evidence that producers have finally started to pull back.

While that is good news for bullish investors, higher natural-gas prices could threaten U.S. economic growth if the rally keeps roaring. Manufacturers tend to be the biggest industrial users and have benefited from the lower gas costs. Households have, too.

“There are cracks in this production boom we’ve had,” said Kent Bayazitoglu, an analyst at energy consulting firm Gelber & Associates in Houston. He said that has been a big factor in the recent price gains.

Nevertheless, many investors are bracing for a rough ride in the historically volatile gas market. After rising to $4.025 a million British thermal units, the highest intraday level since September 2011, gas prices pared gains and ended the day down 2.5 cents, or 0.6%, to $3.9350.

Setting the stage for the recent gains was an increase in demand from utilities, which over the past year have upped their consumption of cleaner-burning gas and cut their use of coal for power generation.

To be sure, any drop in utilities’ gas consumption could weigh on prices. And with natural gas trading near $4, there is less incentive for electricity producers to switch, said Greg Sharenow, a portfolio manager at Pacific Investment Management Co.’s $20 billion Pimco Commodity Real Return Strategy Fund. Still, Mr. Sharenow said slowing U.S. gas output has bolstered the outlook for prices over the longer term. Less drilling “is definitely part of the equation,” he said. The number of rigs drilling for natural gas stood at 431 last week, down 35% from a year earlier, according to oil-field-services company Baker Hughes Inc.
The Department of Energy forecasts that the nation’s gas output will rise 0.7% this year, the smallest increase since 2005.

Some analysts said there is a good chance output could even start declining. Analysts at Barclays surveyed 52 North American gas producers, including 20 of the largest firms operating in the region. Based on the results of the survey, the analysts estimate that those companies’ output would decline 0.4% this year.

Cold weather and slowing output growth are cutting into U.S. stockpiles. The amount of gas held in underground storage totals 1.876 trillion cubic feet, down about 21% in the past year, according to the latest Department of Energy data.

Just a few months ago, most analysts expected gas supplies at the end of the winter to stand above two trillion cubic feet heading into the summer months when gas usage falls. Now, several more weeks of withdrawals from storage are anticipated.

Rich Ilczyszyn, a trader and chief market strategist at iiTrader.com, said forecasts made in February for chillier temperatures prompted him to bet on rising prices last month, when futures were near $3.30. “I wish I’d had more on,” he said.

Mr. Ilczyszyn isn’t the only one making bullish bets. Last week, bets on higher natural-gas prices outstripped those on lower prices among hedge funds and other money managers, according to the Commodity Futures Trading Commission. That is the first time since November that speculative investors have held net bullish positions.

Other investors are wagering on higher gas prices in the stock market. Kent Croft, president of asset manager Croft Leonminster Inc. in Baltimore, has been adding to his stakes in natural-gas producers in recent months, part of a bet that prices will keep rising as gas usage by power plants and trucking fleets catches up with output.

“In the short term, you have the normal commodities cycle, weather and or economic activity, affecting pricing,” said Mr. Croft, who manages $950 million. But natural-gas producers are “a place you can invest for the long term.”

 
sourced wallstreetjournal.com March 26, 2013