Dec. 19 (Bloomberg) -- Natural gas futures fell to the lowest price in more than two years as ample supplies and forecasts for milder weather spurred traders to sell positions.

Temperatures are expected to rise after a cold period ends around Dec. 25, according to forecaster MDA Federal Inc.’s EarthSat Energy Weather of Rockville, Maryland. Prices gained in earlier trading as a storm brought cold and snow to the Midwest and East, sparking demand for the heating fuel.

“We failed earlier in the morning to push it higher and it began to consolidate,” said Brad Florer, a trader at Kottke Associates Inc. in Louisville, Kentucky. “When it rolled over there was no buying to come in. When you get these thin markets they trade more technically than normal.”

Natural gas for January delivery fell 21.4 cents, or 3.9 percent, to settle at $5.334 per million British thermal units at 3:11 p.m. on the New York Mercantile Exchange. It was the lowest closing price since Sept. 27, 2006.

February $5 puts were the most active gas options today, based on electronic trading data. The puts, which give holders the right to sell gas at that price, began to surge at about 1:45 p.m., just as future contracts were starting to drop.

The puts rose 6.1 cents to 25 cents, or $2,500 per futures contract. Volume for the options was 155 contracts. January $5.50 puts were the second-most active, gaining 10.6 cents to 29 cents on a volume of 35 contracts.

The underlying February futures contract fell 22.7 cents, or 4.1 percent, to $5.384 per million Btu.

“There’s thin market fishing going on here, with people looking for stops and hoping they can get a little flush here and keep the momentum on the down side,” said Florer.

Falling Prices

Investors with sell stops, orders to sell futures at a specific price, might have been forced to close their position once the market began falling.

“We’re dealing with holiday conditions; if someone had a sizable order to pitch, they sent the market lower,” said Michael Rose, a director of trading at Angus Jackson Inc. in Fort Lauderdale, Florida. “Once you hit some stops it started to snowball, especially when you get late in the day on a Friday.”

Volume today for the January contract was 38,131 at around 2:30 p.m., 30 percent lower than yesterday’s total and down 13 percent from a week ago.

A recession in the U.S. has cut demand from industrial users of the fuel, keeping supplies at above-average amounts for this time of year. Usage may slow more over the next two weeks as the Christmas and New Year’s holidays prompt plant closures.

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

Last Updated: December 19, 2008 16:15 EST