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Natural gas futures rose by 2.8% Friday as investors begin to bet that prices near $2 have spurred demand and may result in production cuts.
Natural gas for June delivery rose 6.0 cents to settle at $2.186 a million British thermal units on the New York Mercantile Exchange, the highest settlement since April 3. Prices have surged by 15% in the past six session since falling to a decade-low of $1.907 April 19.
Prices have risen amid increasing concern among gas traders and analysts that low prices are spurring a surge in usage among utilities and manufacturers eager to use the cheap fuel instead of more expensive alternatives.
While U.S. gas inventories remain near record levels, rising demand coupled with signals that producers may continue to scale back output could help put a dent in the supply glut.
"There's a huge amount of demand coming from the electricity sector, and a huge amount of demand coming from the industrial sector. The overall demand remains very, very high," said Kyle Cooper, managing partner at IAF Advisors in Houston. "I think we're going to whittle this surplus down pretty quickly."
The U.S. Energy Information Administration said Thursday that U.S. inventories rose by 47 billion cubic feet in the week ended April 20. The increase came in roughly in line with analysts' estimates, but the agency also revised downward the last four weeks of inventory data.
Natural gas prices have been stung by a mild winter that has only worsened a supply glut caused by record production. U.S. inventories stood at 2.548 trillion cubic feet last week, on pace to reach total storage capacity by October.
Analysts don't expect a rapid drop in available gas. But output cuts and rising demand, if continued, could help slow injections through the summer and keep prices from plumbing the depths seen earlier this month.
On Monday, ConocoPhillips (COP) said it will continue to shut down U.S. natural gas output, and on Wednesday, Encana Corp. (ECA, ECA.T) said it won't renew hedges that protected the Canadian gas producer from low prices, suggesting it believes prices will soon rebound from decade lows.
U.S. gas-drilling rigs fell by 18 this week to 613, according to oil-field-services company Baker Hughes Inc. (BHI). The rig count is down by more than 30% from last year.
"We may see other producers starting to signal a cut in production," said Dominick Chirichella, an analyst at the Energy Management Institute. "I remain neutral with an eye toward the upside."
-By Jerry A. DiColo, Dow Jones Newswires; 212-416-2155; firstname.lastname@example.org