Jan. 23 (Bloomberg) -- Natural gas fell to the lowest price in more than two years in New York as demand for the industrial and heating fuel slumps in a deepening recession.

Weak factory demand blunted storage withdrawals during frigid weather last week. A supply decline of 176 billion cubic feet reported by the U.S. Energy Department today was about 23 percent less that it would have been in a healthier economy, said Scott Speaker, JPMorgan Chase & Co.’s natural gas strategist.

“Under last year’s demand conditions, with the same degree days, we would have been looking for a 225 to 230 billion-cubic- foot withdrawal,” Speaker said in an e-mailed response to questions. “The recession has resulted in a severe loss in the manufacturing sector.”

Natural gas for February delivery fell 16.3 cents, or 3.5 percent, to settle at $4.518 per million British thermal units at 3:07 p.m. on the New York Mercantile Exchange, the lowest closing price since Sept. 27, 2006. Gas has dropped 20 percent this year and is down 67 percent from the 2008 high of $13.694 per million Btu reached on July 2.

U.S. gas inventories fell to 2.56 trillion cubic feet in the week ended Jan. 16, 1.2 percent above the five-year average, the Energy Department said.

“The situation we’re in is one of extreme weakness in the industrial sector,” Speaker said in a conference call today after cutting his forecast for gas prices.

Gas will average $5.69 per million Btu on the New York exchange this year, down from $6 predicted on Dec. 17, Speaker said in a report.

Job Losses

The number of Americans filing their first unemployment benefit claims matched a 26-year high, the Labor Department said yesterday.

“It has become clearer in the past month that severe manufacturing weakness will have an impact on natural-gas demand that goes beyond a brief hiccup or temporary condition simply needing some producer-driven tightening,” Speaker said.

Steel companies, carmakers and chemical companies, which use gas to heat buildings and power machinery, have shuttered plants or slowed operations in the past year.

ThyssenKrupp AG, Germany’s largest steelmaker, said today it will delay production at stainless steel operations in Alabama for a year because of a slump in demand.

In the past month, DuPont Co., the third-largest chemical maker, announced plans to cut 4.2 percent of its workforce because of sliding demand. Dow Chemical Co., the biggest U.S. chemical maker, also enacted production curtailments. Alcoa Inc., the world’s largest aluminum maker, announced its third production cut in as many months earlier in January.

More Cold Needed

“We had some of the coldest weather in years and still only drew 176 billion,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “That is showing us that it’s going to take consistently cold weather to get natural gas stockpiles below the five-year average.”

The week ended Jan. 17 was 30 percent cooler than the same period a year earlier, based on heating degree days, a measure of energy demand, data from the National Oceanic and Atmospheric Administration show.

Heating needs last week were 14 percent above normal for the entire U.S., as lower temperatures covered the Midwest and Northeast, David Salmon of Belton, Missouri-based Weather Derivatives, said in a note on Jan. 19.

The slowing U.S. economy probably limited withdrawals from storage, he said. Salmon expected stockpiles to fall 162 billion cubic feet, compared with as much as 237 billion in previous years when similar temperatures occurred.

About half of U.S. homeowners rely on gas for heating.

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

Last Updated: January 23, 2009 16:05 EST