Natural Gas Falls From $4 on Smaller-Than-Forecast Supply Drop

Photographer: Daniel Acker/Bloomberg

Natural gas is flared near at a crude oil well site outside South Heart, North Dakota. Close

Natural gas is flared near at a crude oil well site outside South Heart, North Dakota.

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Photographer: Daniel Acker/Bloomberg

Natural gas is flared near at a crude oil well site outside South Heart, North Dakota.

Natural gas futures slid after trading at an 18-month high above $4 following a government report showing that U.S. stockpiles declined by less than expected last week.

Gas slipped 0.6 percent after rising to $4.025 per million British thermal units, the highest intraday price since Sept. 15, 2011. Energy Information Administration data showed that inventories fell 62 billion cubic feet in the week ended March 15 to 1.876 trillion cubic feet. Analyst estimates compiled by Bloomberg showed an expected withdrawal of 70 billion.

“It’s the first bearish storage number we’ve had in a while, so you would expect to see some selling,” said Kent Bayazitoglu, an analyst at Gelber & Associates in Houston. “The market may not be ready to sustain this $4 pricing.”

Natural gas for April delivery fell 2.5 cents to settle at $3.935 per million British thermal units on the New York Mercantile Exchange. Volume was more than double the 100-day average at 2:44 p.m. The futures have climbed 17 percent this year, the second-best performer after cotton on the Standard & Poor’s GSCI spot index of 24 commodities.

Open interest in gas futures rose to a fourth-straight record yesterday, reaching 1.348 million contracts.

The discount of April contracts to October, a gauge of summer demand for gas, widened 1 cent to 12.3 cents. The discount of October to January widened 0.2 cent to 30.2 cents.

Options Trading

April $4 calls were the most active gas options in electronic trading. They dropped 39 cents to $1.7 cents per million Btu on volume of 1,609 contracts as of 3:10 p.m. Calls accounted for 49 percent of options volume.

Implied volatility for at-the-money gas options expiring in May was 32.19 percent at 3 p.m., down from 33.44 percent yesterday.

Inventories in the so-called producing region in the south- central U.S. increased by 4 billion cubic feet because one or more producers reclassified supplies from base gas, or supplies needed to maintain adequate pressure, to working gas, or stockpiles available for delivery, the department said.

The stockpile decrease was bigger than the five-year average decline for the week of 26 billion cubic feet, the EIA report showed. A surplus to the five-year average fell to 9.5 percent, the narrowest since Dec. 7, from 11.4 percent the previous week. Supplies were 21.1 percent below year-earlier inventories, the widest year-on-year deficit since April 2008.

WSI Corp. in Andover, Massachusetts, said temperatures may be mostly normal or warmer-than-average in the lower 48 states from March 31 through April 4. About 50 percent of U.S. households use gas for heating, according to EIA data.

Above Normal

The low in New York on April 3 may be 43 degrees Fahrenheit (6 Celsius), 2 more than the usual reading, according to AccuWeather Inc. in State College, Pennsylvania. Cleveland may see 44 degrees, 7 higher than the norm.

Barclays Plc recommends for U.S. natural gas “a short position in the calendar 2014 versus calendar 2015 average price spread, which has narrowed significantly in recent weeks as the front end of the curve has been supported by forecasts for colder-than-normal weather,” Kevin Norrish, a managing director at the bank in London, said in a note to clients today.

The price gap may widen as industrial demand accelerates, U.S. liquefied natural gas exports commence and exports to Mexico grow, Norrish said. The retirement of coal-fired power plants will also boost gas consumption, he said.

Price Forecast

The U.S. decreased its outlook for prices in a March 12 report. Gas prices at the benchmark Henry Hub in Erath, Louisiana, will average $3.41 per million Btu this year, lower than the previous estimate of $3.53, according to the EIA’s Short-Term Energy Outlook.

The forecast for total gas consumption fell to 70.02 billion cubic feet a day from 70.31 billion in the report. Rising prices will curtail gas demand from power generators, the agency said.

Gas output rose to an all-time high of 28.5 trillion cubic feet in 2011, led by record output from shale deposits, the EIA said in a report Jan. 7. Shale accounted for 30 percent of total production in 2011, up from 22 percent the previous year.

The boom in oil and natural gas production helped the U.S. cut its reliance on imported fuel. America met 84 percent of its energy needs in the first 11 months of last year, government data show. If the trend continued through 2012, it will be the highest level of self-sufficiency since 1991.

To contact the reporters on this story: Christine Buurma in New York at cbuurma1@bloomberg.net;

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

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