Sept. 3 (Bloomberg) -- Natural gas futures fell in New York to the lowest level since March 2002 after a government report showed stockpiles expanded more than average to a record for this time of year.

Supplies rose 65 billion cubic feet in the week ended Aug. 28 to 3.323 trillion cubic feet, the Energy Department said. Inventories are the highest for that week since the department began publishing data in 1993. Stockpiles typically gained 64 billion cubic feet for the period in the past five years.

“We’re well supplied and there’s so little demand,” said Michael Rose, director of trading at Angus Jackson Inc. in Fort Lauderdale, Florida. “Some people are starting to question the economic recovery and that adds more pressure to gas.”

Natural gas for October delivery fell 20.7 cents, or 7.6 percent, to settle at $2.508 per million British thermal units at 2:52 p.m. on the New York Mercantile Exchange, the lowest close since March 5, 2002. Gas has dropped 55 percent this year. Today’s decline was the largest in three months. Futures earlier touched $2.50.

Overall U.S. gas consumption may contract by 2.6 percent as the recession that began in December 2007 cuts demand, the Energy Department said in its monthly Short-Term Energy Outlook on Aug. 11.

Gas use at factories is forecast to tumble 8.6 percent this year because of the recession, the department said.

“People are beating up on natural gas because they can,” said Phil Flynn, vice president of research at PFGBest in Chicago. “Supplies are high, so they’re really pressuring the market to the downside.”

Weather Effect

Summer heat, which can increase demand for electricity from gas-fired power plants for air conditioning, is dissipating and there are no immediate threats from storms to output in the Gulf of Mexico, and that is weighing on futures, Flynn said.

Natural gas prices will probably tumble further in the coming weeks, sliding down to a range of $2 to $2.30 by early November, Charles Maxwell, senior energy analyst at brokerage Weeden & Co. in Greenwich, Connecticut, said in a note to clients late yesterday.

“There is not enough winter storage space left in the system to handle every producer’s surplus volumes in this year of record supplies and depressed demand,” he said.

A combination of the economic slowdown, a prior period of higher prices that pushed some industrial consumers of gas out of the U.S., new domestic supplies and increased capacity to import liquefied natural gas from overseas has created a “perfect wave of excess natural gas supplies in the U.S.,” Maxwell said.

Price Forecast

Weeden forecasted earlier this year that New York futures would average $3.50 in the third quarter and $4 in the fourth.

Supplies were 18 percent above the five-year average last week, compared with 3.7 percent a year earlier, according to Energy Department data.

“We’re getting to the point where people are starting to worry about where they’re going to put gas and what that entails for the market,” said Brad Florer, a trader at Kottke Associates Inc., a commodity futures broker in Louisville, Kentucky. “If they have to take gas to market, instead of putting it in storage, the front end of the curve will continue to get whacked.”

Contango

Natural gas for delivery in January settled at $4.819 per million Btu, a premium of about $2.311 to October futures. When prices for future delivery are higher than near-month contracts it’s a situation known as contango, which typically encourages companies to put supplies in storage now for use later in the year.

October 2009 $3 call options were the most active natural gas options today, based on Nymex electronic trading data as of 3:31 p.m. They fell 7.5 cents to 8 cents.

October 2009 $2 puts, the second-most active, rose 1.8 cents to 5.2 cents and were followed by the $2.50 puts, which gained 6.9 cents to 23 cents.

The $2 put, which became available on March 11, was trading at its highest price ever today and has risen from a contract low of 0.8 cent reached on Aug. 6 as futures declined 33 percent.

Calls give holders the right to buy gas at that price. Puts provide the right to sell.

Near Record Storage

An increase of inventories to the end of October that matches the average increase of the past five years will put supplies in storage near 3.9 trillion cubic feet, Cameron Horwitz, an analyst at SunTrust Robinson Humphrey Inc. in Houston, said yesterday.

Peak natural gas storage capacity rose 100 billion cubic feet to an estimated 3.889 trillion cubic feet as of April as operators expanded to meet rising production, according to an Energy Department report on Aug. 31.

The previous high for storage is 3.545 trillion cubic feet, reached on Nov. 2, 2007, according to the department.

“The physical aspect of the commodity is becoming a problem, unless some demand comes on quickly or we get some weather that changes things,” said Florer. “As long as those things remain constant, like they have for months now, then I don’t think the bulls have much to hang their hats on any time soon.”

Futures declined along with the United States Natural Gas Fund LP.

The fund, the world’s largest exchange-traded fund in gas, fell 35 cents, or 3.7 percent, to $9.10 a share at 3:05 p.m. The fund owns futures contracts and swaps and tries to track price changes in the fuel. The ETF’s units have declined 61 percent this year.

“A lot of people are worried about their funds” so they’re dumping them, said Rose of Angus Jackson.

To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net.

Last Updated: September 3, 2009 15:35 EDT