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Natural Gas Declines on Concern Demand Won't Be Strong Enough to Ease Glut
Natural gas futures declined in New York on concern the economy isn’t strong enough to stoke demand and soak up excess supply of the power plant fuel.
Gas slumped a day before an Energy Department report that may show U.S. gas stockpiles increased by 55 billion cubic feet in the week ended Aug. 27, according to the median of 17 analyst estimates compiled by Bloomberg. The five-year average is an increase of 62 billion. Inventories last week were 6.2 percent above the five-year average.
“The fundamentals haven’t changed,” said Lannie Cohen, president of Capitol Commodity Services in Indianapolis. “There’s still more natural gas than they know what to do with. This thing could make another move downward in the next few days.”
Natural gas for October delivery fell 5.4 cents, or 1.4 percent, to settle at $3.762 per million British thermal units on the New York Mercantile Exchange.
The fuel’s 14-day relative strength index dropped to 30.3 from 32.3, the third day it’s stayed above 30. A reading of 30 typically signals prices will increase, while 70 often indicates a decline. Technical analysts use the index to determine when a security has fallen or risen too far.
Gas has fallen 32 percent this year on speculation that stockpiles will reach near record highs by the end of October. U.S. gas inventories at the end of October will climb to 3.752 trillion cubic feet, according to the Energy Department. Stockpiles rose to a record 3.84 trillion in November 2009.
Early Rally Falters
The fuel couldn’t sustain a rally to $3.878 after the Institute for Supply Management’s gauge of manufacturing rose to 56.3. Economists forecast the ISM factory index would decline to 52.8, the median of 78 projections in a Bloomberg News survey.
“Traders see there’s no demand in the immediate future, and that’s what we’ve been talking about for months,” said Michael Rose, director of trading for Angus Jackson Inc. in Fort Lauderdale, Florida. “We need demand.”
Gas has also tumbled amid a lack of threats to production in the Gulf of Mexico, which produces 10 percent of U.S. natural gas, from hurricanes, said Larry Young, president of Covenant Trading in Chicago.
“It’s been that way for a while,” Young said. “We’ve dodged bullets so far on hurricanes.”
Hurricane Earl, which is threatening an area from North Carolina to Massachusetts, may reduce demand for gas by lowering temperatures and causing power outages, said Tim Evans, an analyst at Citi Futures Perspective in New York.
With gas below $4, traders must consider the risk of not buying in the middle of hurricane season, the effect of below- average stockpile injections, and the possibility that the market is near a bottom, Evans said.
“Wherever that low price is, we’re closer to it now than we were at $5,” Evans said. The “downside is limited with the upside potential being more open.”
Wholesale natural gas at the benchmark Henry Hub in Erath, Louisiana, fell 6.53 cents, or 1.7 percent, to $3.7301 per million Btu on the Intercontinental Exchange.
To contact the reporter on this story: Mario Parker in Chicago at mparker22@bloomberg.net
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