Icy Chill Sets Energy Prices on Fire

Icy Chill Sets Energy Prices on Fire Scramble for Fuel Amid Wintry Blast Rattles Markets By Nichole Friedman and Brett Philbin The Wall Street Journal January 29, 2014

Denver Walker makes a heating-oil delivery in Pennsylvania this month. Tribune-Democrat/Associated Press

The arctic blast sweeping the U.S. has touched off a scramble for fuel that has driven natural-gas and heating-oil prices to new highs.

Natural-gas prices jumped 10.4% in the futures market Wednesday, ending at a four- year high of $5.557 a million British thermal units. Gas prices have rallied 31% this year. Diesel futures, the benchmark for heating oil prices, have rallied to a five-month high, pushing retail prices for the heating fuel to a record.

Soaring prices are a sign energy traders and suppliers are still coming to grips with extreme weather that has included subzero temperatures in the Midwest and a rare, paralyzing snowstorm in Atlanta this week. Several weeks of below-normal temperatures across a broad swath of the country have drained heating-fuel supplies and taxed the infrastructure that brings gas and heating oil to homeowners.

The prolonged cold snap has caught many investors and suppliers flat-footed. Wintry weather typically has a fleeting effect on prices, with rallies coming to a halt after a few days as warmer temperatures return. But with some forecasters calling for frigid temperatures deep into February, investors are beating a hasty retreat from short-term bearish bets.

"Natural-gas futures can go anywhere. They can go to $15," said John Farley, director of trading at commodities-trading adviser Emil van Essen LLC, a Chicago firm that manages $175 million in assets.

Brandon Williams installs a natural-gas and electric furnace at a home in Kentucky on Tuesday. The Daily Independent/Associated Press

Consumers have largely been shielded from the steep climb in natural-gas prices, because rates often are regulated at the state level. However, heating-oil users, 81% of whom are in the Northeast, have started to feel the pinch to their wallets. Retail heating- oil prices have jumped 12 cents in the past week, to $4.175 a gallon Monday, the most recent data available, tying a record in figures that go back to 1990. Diesel futures ended 1.9% higher at $3.182 a gallon Wednesday. Before this winter, the natural-gas market had grappled for four years with a glut brought on by booming domestic production that helped keep prices stable. In the heating-oil market, demand had fallen as homeowners switched to cheaper and cleaner fuel sources. This fall, refiners that supply the Northeast with heating oil focused instead on maximizing diesel production for export.

The arrival of freezing temperatures in the Midwest and Northeast changed the equation. As temperatures sank across the country, demand for natural gas and heating oil rose. Gas demand hit a record in mid-January, and heating oil use is at a multiyear high for this time of year. Demand overwhelmed pipeline capacity in some areas, leading to local natural-gas prices as high as $135 a million British thermal units in New York.

Analysts and traders say a full-on squeeze is under way in the natural-gas and heating- oil markets this week. Investors cut their bearish bets on natural gas by 10% and reduced their wagers on falling diesel futures by 15% in the week that ended Jan. 21, according to the Commodity Futures Trading Commission.

Meanwhile, suppliers who are worried about low inventory levels are turning to the futures market to lock in heating-oil deliveries next month. Diesel futures are contracts for delivery in New York Harbor, close to most of the major population centers that rely on heating oil. "It's almost a race" among heating-oil distributors in the futures market, said Lawrence Roche, owner of Liquidity Energy LLC, a New York energy brokerage. Mr. Roche said supplies are "super tight" in New York Harbor. Traders say prices should snap back once temperatures do. Natural-gas producers can rebuild inventories in the spring, when milder temperatures typically cause demand to fall. But there is growing concern supplies might not be replenished by next winter.

Last week, refiners imported the most distillate fuel—a category including diesel and heating oil—to the East Coast in three years, likely reducing the threat of local shortages.

Andy Waldock, owner of Commodity & Derivative Advisors in Sandusky, Ohio, who trades diesel futures for about 15 accounts, including his own, said he thinks prices can rise as high as $3.23 a gallon in the near term but then could fall as low as $3.

"The overall structure is generally bullish, but I am not going to buy into this spike," he said.

Write to Nicole Friedman at [email protected] and Brett Philbin at [email protected]