After languishing in decade-low prices for much of the last year, natural gas has emerged as the unlikely best performing commodity so far in 2013, rising 32% from its 2013 low.
Last week alone AECO, Canadian benchmark prices inched 2% upwards to reach C$3.73 per mcf amid one of the worst commodity routs of the past year. Meanwhile, American Henry Hub benchmark climbed 3% last week and is now 31.3% higher than it was at the start of the year.
Analysts credit falling storage levels, which are below 5-year average, as the primary reason for the natural gas rally. An unexpectedly cold and long North American winter has eaten into the inventories, while producers continue to cut natural gas output.
"Natural gas is among the world's best performing commodities so far this year," said Michael Lewis, commodity strategist in Deutsche Bank in a note to clients.
"Even in the midst of a broad based sell-off across the commodity complex, gas prices have continued to rally. We believe fundamentals have tightened not only on account of late seasonal cold in the U.S., but also from supply restraint."
Crude benchmark WTI has dipped 4.45% year-to-date, while Brent has fallen even further to 10.78% in a commodity-wide route. Coal is down nearly 6% for the year.
But some analysts don't see much upside from here for natural gas which are rebounding from their $2 per mcf lows last year.
"We see U.S. natural gas balances tightening gradually this year on shallow production declines and improving industrial demand," said Bank of America Merrill Lynch analysts in a note. "Still, persistently high stocks imply 2Q13 prices could retest $3/MMBtu."
BAML expects Henry Hub prices to average US$3.75/MMBtu this year, and US$4.20/MMBtu in 2014.
"It's not until 2015 that we expect demand to improve structurally. Prices should trade between US$3 and US$4.50/MMBtu over the next two years given well-anchored supply costs and coal-to-gas switching capacity."
A Reuters poll of 28 analysts suggested U.S. natural gas prices may jump 39% this year, to reach US$3.84 per million Btu. Eighteen analysts revised their forecast upwards, five turned bearish, while the rest did not change their opinion.
Stricter environmental rules in 2014 were expected to force more coal plant retirements and boost baseload gas-fired power demand. That should help drive prices up another 10% to US$4.24 though estimates were unchanged from the previous poll.
Prices in 2015 were expected to gain another 8% to US$4.58 as economic activity ramps up and utilities continue to shift to cleaner burning gas instead of coal to generate power.
"On the supply side, the rig count is down and production is probably down, but the question is how much," said Steve Thumb, principal at Energy Ventures Analysis in Virginia.
With files from Reuters