03/13/2012 08:43 EDT | Updated 05/13/2012 05:12 EDT

Natural gas prices surge after Fed offers rosier assessment of economy

A rosier assessment of the economy from the U.S. Federal Reserve on Tuesday gave a boost to flagging natural gas prices.

After declining earlier, natural gas futures surged when the Fed forecast gradual declines in the unemployment rate as the economy expands moderately over the coming months. It also noted that consumer spending and business investment have picked up.

Natural gas rose three cents to finish US$2.299 per 1,000 cubic feet in New York trading. It fell to a 10-year low of $2.269 on Monday.

Oil and gasoline futures also rose. The gains indicate growing confidence in the economy and the potential for stronger energy demand, said Michael Lynch, president of Strategic Energy & Economic Research.

Benchmark oil increased 37 cents to finish at $106.71 in New York. Brent crude ended up 88 cents at $126.22 per barrel in London.

The price for natural gas has fallen about 26 per cent this year because homeowners and businesses used less heat during the mild winter. The savings helped offset the higher price of gasoline and diesel fuel. And about one-quarter of the nation's electricity is generated using natural gas.

At the same time, natural gas production is booming because energy companies are accessing underground reserves using newer drilling techniques. The nation's natural gas stockpiles are now about 48 per cent above the five-year average.

Energy consultant Stephen Smith estimated there is 800 billion cubic feet more natural gas in storage than what is typical for this time of year. To bring supplies back into balance, over the course of a year demand would have to exceed supply by about 2.5 billion cubic feet every day.

With the price dropping, some big natural gas companies like Chesapeake Energy Corp. have cut production. The number of horizontal gas drilling rigs fell about 30 per cent from October to February. But it will take time for the reduction to affect supplies. And other big producers, like Exxon Mobil Corp., have pledged not to cut back. Traders will need to see a clear trend of lower production before they'll bet on higher prices, Smith said.

In other trading, heating oil futures rose three cents to finish at $3.27 per gallon and gasoline futures increased three cents to $3.35 per gallon.

At the pump, the U.S. average for retail gas increased less than a penny to $3.81 per gallon, according to AAA, Wright Express and the Oil Price Information Service. That's nearly 30 cents more than a month ago and about 25 cents more than a year ago.

In Canada, the price at the pump averaged C$1.282 per litre, up from $1.228 a month ago and $1.215 at this time last year.