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Story by The Wall Street Journal

The benchmark natural-gas price soared to a nearly four-month high, bolstered by rising demand from power generators that are pivoting away from coal.

This year, utilities will retire 4.3% of the nation’s coal-fired electricity-generation capacity that is either outdated or unable to meet new environmental regulations, according to the U.S. Energy Information Administration. As a result, the burden of making up that shortfall will fall on gas-fired facilities, boosting overall demand and prices for gas.

U.S. natural-gas inventories posted a smaller-than-expected increase last week, according to EIA data released Thursday. That coincided with above-normal temperatures in the East and Midwest, highlighting the role power-plant demand will play in the natural-gas market this summer when air-conditioning use could force generators to run hard.

Natural-gas futures Thursday rallied 2.5% to $3.008 a million British thermal units, the highest level since Jan. 16 on the New York Mercantile Exchange. The jump puts natural-gas in bull-market territory, defined as a rise of 20% from a recent low.

Gas futures have surged 21% since hitting a nearly three-year low less than three weeks ago. Prices slumped earlier in the year on a combination of robust U.S. production and average consumption during a relatively mild winter. Natural gas is mostly used as a heating fuel.

Gas traders are “really expecting that the power sector will bail out an oversupplied market,” said Teri Viswanath, a natural-gas strategist at BNP Paribas in New York.

Neuberger Berman Group LLC, which oversees $251 billion, has exposure to shares of power producers and natural-gas exporters, a position that is likely to benefit if demand for natural gas increases and prices rise for both gas and power.

Most of the coal-fired power plants closing this year will shut down in the next three weeks, according to data provider Genscape Inc. That makes this a critical point in a transition that is unfolding over several years, said Ron Silvestri, an analyst and portfolio manager at Neuberger Berman. “I don’t think the market has really grasped it yet,” he said.

Mr. Silvestri himself turned on the air conditioning at his New Jersey home at the start of the month. For him, that was an indication that short-term factors, such as weather, would keep gas prices aloft as well.

To be sure, investors are still largely bearish on natural-gas futures. Though they have pulled back slightly, hedge funds and other money managers in the week ended April 28 held the biggest number of net bearish bets on the commodity since 2011, according to the U.S. Commodity Futures Trading Commission.

Gas supplies are likely to remain abudant, even if they aren’t growing as fast as expected, analysts say. Last week, 111 billion cubic feet of gas was added to underground storage, according to the EIA. While that’s short of the expected 117 bcf, it is 35% larger than the five-year average for this time of year.

Gresham Investment Management LLC has started to take profits on bullish bets made earlier in the year on the belief that more power would be gas-fired.

At prices above $3/MMBtu, burning coal becomes more economical, so gas demand from power plants could begin to wane, said Jonathan Berland, senior managing director at the $11 billion firm.

The rally has gone so far because “people are looking at a relatively short-term change in data and then projecting that change out in data ad infinitum,” Mr. Berland said. “That’s a dangerous thing to do.”

The EIA estimates that gas-fired power will account for a smaller percentage of U.S. power generation later in the year, falling to 28% in December from 32% in May. The EIA expects coal’s share to rise to 38% from 33% in the same time span.