Natural gas for January delivery is trading at the smallest premium to September futures in seven years as traders speculate that economic growth will slow.
January futures, covering the period when North American heating demand typically peaks, were 69.6 cents higher today than gas for September delivery. That compares with an average spread of $1.58 over the past 10 years. The difference is the narrowest for the day since the summer of 2003, when stockpiles indicated ample winter inventories.
“The market is essentially signaling that it feels comfortable enough that supply will be adequate,” said Cameron Horwitz, an analyst in Houston at SunTrust Robinson Humphrey Inc., a unit of Georgia’s biggest bank.
Gas futures have dropped 31 percent this year amid rising output and waning demand as the U.S. struggles to avoid sliding back into a recession. Production in March rose to 1.919 trillion cubic feet, the highest level since 1974, Energy Department data show. Fuel use by industrial consumers may be 1.4 percent lower this year than in 2008, according to the department.
Natural gas for September delivery fell 16.8 cents, or 4.2 percent, to $3.871 per million British thermal units on the New York Mercantile Exchange today, the lowest settlement since March 31. The January contract declined 6.9 cents to $4.567.
Gas for October delivery, which will become the front-month contract after September futures expire on Aug. 27, fell 16.3 cents to $3.896 per million Btu, 67.1 cents lower than the January contract.
Weather in the U.S. Midwest, East and South will be mostly warmer than normal this winter as the La Nina phenomenon drives up temperatures, according to Commodity Weather Group in Bethesda, Maryland. Heating demand this winter will be 29 percent lower than last year, the forecast showed.
About 72 percent of households in the Midwest use natural gas for heating, according to the Energy Department.
Bank of America-Merrill Lynch yesterday cut its forecast for U.S. gas futures prices in 2011 to an average of $5 per million Btu from $6 because of rising U.S. production.
The U.S. economy probably grew 1.4 percent in the second quarter, according to the median of 79 economist forecasts in a Bloomberg survey before a government report Aug. 27, down from an earlier estimate of 2.4 percent.
Gas consumption by factories, steel mills and chemical plants during the recession last year tumbled to 16.82 billion cubic feet a day, the lowest level since at least 1991, Energy Department data show. Use will average 17.92 billion cubic feet a day this year compared with 18.17 billion in 2008, according to department estimates.
“Industrial demand is higher than last year but it’s still weak,” said James Williams, an economist at WTRG Economics, an analysis and research firm for energy companies based in London, Arkansas.
Inventory increases are less likely to be disrupted by hurricanes in the Gulf of Mexico because more U.S. production takes place inland than in the past, department data show.
About 10 percent of U.S. gas output will come from federal waters in the Gulf of Mexico this year, down from 17 percent five years ago, according to Energy Department estimates. Gulf output last year totaled 2.4 trillion cubic feet, down 52 percent from 1999.
Production from shale wells rose 71 percent in 2008 from a year earlier to 2.02 trillion cubic feet, according to the most recent Energy Department data. Shale gas will account for 34 percent of total production in 2035, doubling from 17 percent in 2008, department estimates show.
U.S. stockpiles rose 27 billion cubic feet in the week ended Aug. 13 to 3.012 trillion, the second-highest level on record for that time of the year. Storage levels last November rose to an all-time high of 3.84 trillion cubic feet.
“It basically comes down to the fact that people are just not that concerned about supply,” said Martin King, an analyst at FirstEnergy Capital Corp. in Calgary. “With storage being so high, price volatility should stay down.”
The spread between the September and January contracts was 61.3 cents on Aug. 25, 2003. Gas inventories that year showed a record gain of 147 billion cubic feet in the week ended July 4. Inventory increases were above the five-year average during most of that summer, according to data compiled by Bloomberg.
Gas prices dropped as low as $4.43 per million Btu on Sept. 26 that year. They then more than doubled to trade at $9.577 on Feb. 25 the next year as below-normal temperatures boosted demand.
U.S. gas drilling rigs totaled 985 last week, up 42 percent from a year earlier, according to a report from Baker Hughes Inc. on Aug. 20.
The U.S. on Aug. 5 cut its forecast for the 2010 Atlantic hurricane season to 14 to 20 named storms, from 14 to 23, because of reduced activity in the first two months of the season.
Hurricane Alex and Tropical Storm Bonnie this year reduced production by 8 billion cubic feet, less than the 20 billion the government had expected, the department said in its monthly Short-Term Energy Outlook on Aug. 10.