Natural Gas Drops on January Weather Outlook, Record Production

Natural gas futures fell for the fourth time in five days after revised forecasts called for milder weather in late January that would reduce fuel demand and a government report showed record production.

Gas slid 0.6 percent after MDA Weather Services said a midday weather update showed warmer weather for the Midwest and the East over the next 11 to 15 days. Output in the contiguous U.S. states climbed 0.4 percent to a record 73.54 billion cubic feet a day in October, according to the Energy Department’s monthly EIA-914 report.

“The market is holding out hope that colder weather at the end of January will salvage the heating season,” said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York. “The problem is the 11- to 15-day forecast turned warmer. Less heating demand than originally expected will mean slightly higher end-of-season storage levels. The 914 data is just affirmation that supplies are continuing to grow.”

Natural gas for February delivery dropped 2.1 cents to settle at $3.266 per million British thermal units on the New York Mercantile Exchange. Trading volume of 174,473 contracts at 2:42 p.m. was 42 percent below the 100-day average. Prices have risen 6.7 percent from a year ago.

April $2.50 puts were the most active options in electronic trading on the Nymex. They were down 0.4 cent to 0.9 cent on volume of 1,873 lots as of 2:44 p.m. Puts accounted for 69 percent of the volume.

Weather Service

The weather outlook, based on an updated National Weather Service model, “has come in substantially warmer” from Jan. 17 through Jan. 21, Steven Silver, a meteorologist with MDA in Gaithersburg, Maryland, said in a note to clients. Below-normal temperatures in the Midwest will become more seasonal during the period and the East will see milder weather, he said.

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

Goldman Sachs Group Inc. cut its 2013 gas price forecast by 12 percent to $3.75 per million Btu from $4.25 because of mild weather, Johan Spetz, an analyst with the bank in New York, said in a note to clients today.

“The market will likely be left with more gas in storage by the end of the winter than we had anticipated,” Spetz said.

Unusually cold weather helped reduce a gas surplus at the end of December after it widened earlier in the month, according to the department’s weekly gas inventory report released Jan. 4.

Gas Surplus

U.S. stockpiles fell 135 billion cubic feet to 3.517 trillion in the week ended Dec. 28, exceeding the five-year average drop for the week of 111 billion.

A surplus to the five-year average fell to 12.4 percent from 12.8 percent the previous week, the department said. The supply gap from year-earlier levels narrowed to 0.7 percent from 2.3 percent. The surplus has persisted since September 2011 as mild weather reduced demand and output rose to an all-time high.

“This turn in the weather for end January is incredibly important to inventory forecasts,” Viswanath said. She now expects stockpiles at the end of the heating season in March to total about 2 trillion cubic feet instead of at 1.83 trillion based on her original prediction in November.

Total U.S. gas production rose 2.5 percent in October to 82.93 billion cubic feet a day, the most in nine months, as new wells came online at the Marcellus shale in the Northeast and the Bakken shale in North Dakota, the department said.

Shale Formations

Record production and stockpiles came as drilling technologies such as hydraulic fracturing, or fracking, unlocked deposits in shale formations. Output of marketed gas in 2013 will average 69.59 billion cubic feet a day, up 0.5 percent from a record 69.22 billion last year, the department said in its Dec. 11 Short-Term Energy Outlook.

The boom in oil and gas output helped the U.S. meet 83 percent of its energy needs in the first nine months of 2012, on pace to be the highest annual level since 1991, department data show.

Demand for gas-fueled electricity generation may also decrease as output rises from U.S. atomic reactors. Total nuclear-power production increased by 972 megawatts, or 1.1 percent, to 92,828 megawatts from yesterday, according to U.S. Nuclear Regulatory Commission data compiled by Bloomberg. Capacity was 91 percent.

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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