NEW YORK: Analysts expect US natural gas prices - buoyed by demands of a recovering economy and concerns over dwindling output - will hold near record highs this month.

And while the market seems resigned to bullish prices, traders point to ample supplies of gas in storage tapped to meet what so far has been a generally mild heating season, fundamentals that normally would point to weaker prices.

Increasingly, however, a "normal" winter gas market spells a season of intense price volatility, driven by fear.

"We are in uncharted territory, and nobody wants to get caught short," Sam Brothwell, an analyst with Merrill Lynch, said last Tuesday in a research report.

"We believe the market is ... coming to grips with the fact demand outstrips our ability to grow domestic supply of America's favourite fuel."

Natural gas prices popped last week to near-record levels, to top US$7 per million British thermal units (mmBTU).

Most traders have cited rising heating demand as furnaces have been fired up in cold weather in New York and Chicago.

But experts suggest short-term weather forecasts are only one element of a complex trade picture that has boosted spot gas, or gas for next-day delivery, to US$7.04 per mmBtu, 41 per cent above the year-ago price of US$4.99 per mmBtu.

Short covering

Late last year, many traders sold the market short. They bet prices would decline after producers managed to sock away above-average amounts of gas in storage to meet heating needs this winter heating season.

A quick cold snap early this winter pushed prices higher, forcing those in short positions to buy gas to meet sales commitments, which, in turn, boosted prices.

Although temperatures in key gas-using areas, such as Chicago and New York, returned to average above-normal in December, gas prices did not tumble to the levels seen before the rally, due in part to strong crude oil.

Sources suggest a new shot of cold air early this month built gas prices up from the elevated short-covering platform.

"Part of the overall surge in ... prices recently has been tied to aggressive short covering - more recently the move has been associated with the cold weather we are seeing," said James Yannello, senior utilities analyst with UBS Investment Research, a unit of Swiss bank UBS AG.

Despite expectations of below-normal temperatures through the Northeast and the eastern half of the Midwest into mid-January, forecasters generally have not called for this winter to be as cold as the below-normal average last winter.

Improving demand

Phillip Pace, a natural gas industry analyst with CSFB in New York, told a conference call last Tuesday that gas prices will remain strong due to an "improving demand trend" based mainly on the economic recovery in the United States, where industrial activity accounts for about one-third of total gas demand.

He also cautioned the supply squeeze, stemming from the depletion of older fields in North America, will likely remain a concern this year.

But he said lofty crude oil prices were supporting the entire energy complex.

Prompt crude oil futures on the New York Mercantile Exchange are fetching about US$34 a barrel, their highest level since March 2003.

"It's not at all out of question you could have US$7 (per mmBTU) gas in February, but it depends on oil prices ... and the weather," Pace said.

Agencies via Xinhua

(Business Weekly 01/13/2004 page2)