Natural Gas Futures Fall on Forecasts for Milder U.S. Weather

Natural gas fell in New York as the outlook for mild January weather signaled lower demand and reduced the first annual gain in five years.

Futures dropped 3.4 percent as MDA Weather Services in Gaithersburg, Maryland, predicted above-normal temperatures in the eastern U.S. over the next six to 14 days. Gas snapped a four-year losing streak as record demand from power plants during an unusually hot summer helped shrink an inventory glut.

“In the first half of January, the weather on the Eastern Seaboard doesn’t look too threatening,” Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania, said. “The surplus is going to be expanding for the next couple of weeks. As soon as we work through the current overhang, we will start to see some semblance of firmness in the markets.”

Natural gas for February delivery dropped 11.8 cents to settle at $3.351 per million British thermal units on the New York Mercantile Exchange. The futures climbed 12 percent in 2012 to post their first annual gain since 2007. Prices increased 0.9 percent from October through December, making it the third straight quarterly gain.

Futures trading volume was 54 percent below the 100-day average at 2:55 p.m. The market will be closed tomorrow in observance of New Year’s Day.

Gas has staged a sharp turnaround since plunging to a 10- year low of $1.902 in April after the fourth-warmest U.S. winter on record crimped demand and a surplus swelled to a six-year high. Electricity generators responded to the low prices by burning a record amount of fuel as it became cheaper than coal in most regions, Energy Department data show.

$3 Gas

Prices may head back toward $3 in the coming weeks amid milder weather and a sell-off that typically takes place in January and February based on historical seasonal trends, Schork said. He expects prices to rally again toward the end of March.

The low temperature in Chicago on Jan. 8 may be 28 degrees Fahrenheit (minus 2 Celsius), 11 above normal, and New York City’s low may be 10 above the usual reading at 37 degrees, according to AccuWeather Inc. in State College, Pennsylvania.

About 50 percent of U.S households use gas for heating, Energy Department data show.

“It’s expected to be a lot hotter in the next two to three weeks,” said Victor Zevallos, an energy trader at INTL Hencorp Futures LLC in Miami. Weekly inventory “withdrawals are going to be smaller and that will make prices go down,” he said.

2012 High

Futures have plummeted 15 percent since rising to a one- year intraday high of $3.933 on Nov. 23 on below-average weekly stockpile declines due to mild weather.

This year will probably overtake 1998 as the hottest on record in the U.S., according to the National Oceanic and Atmospheric Administration. The first 11 months were the warmest start to any year in the contiguous 48 states since the nation began keeping records in 1895, NOAA’s Climatic Data Center said Dec. 6.

U.S. gas inventories totaled 3.652 trillion cubic feet in the week ended Dec. 21, a record high for this time of the year, the department said last week. Stockpiles had reached an all- time high of 3.929 trillion during the week ended Nov. 2.

A surplus widened to 12.8 percent above the five-year average for the seven-day period from 4.6 percent at the end of November. The surplus had risen to 61 percent at the end of March.

Speculative Bets

Money managers cut U.S. natural gas bets on to the lowest level since April given the outlook for mild weather mid- January, according to the Commodity Futures Trading Commission’s Dec. 28 Commitments of Traders report.

Net-long bets on four gas contracts, or wagers on rising prices, fell by 9,566 futures equivalent, or 13 percent, to 63,061 in the week ended Dec. 24, CFTC data show.

The net position includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for the benchmark New York futures.

The Energy Department expects spot Henry Hub prices to average $3.68 in 2013, up 32 percent from 2012, amid lower production growth, according to its Dec. 11 Short-Term Energy Outlook.

Total Production

Total U.S. marketed gas production will average 69.59 billion cubic feet a day next year, up 0.5 percent from a daily record 69.22 billion in 2012, the monthly report said.

Output rose 4.5 percent this year as drilling technologies, such as hydraulic fracturing, or fracking, made it more economic to extract gas from shale deposits such as the Marcellus in the Northeast. The U.S. produced 83 percent of its energy in the first nine months of the year, on track to be the highest level since 1991, department data show.

To contact the reporter on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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