Natural Gas Drops to Five-Month Low on U.S. Inventory Outlook
Natural gas futures dropped in New York to the lowest price in more than five months on speculation that mild weather will widen an inventory surplus.
Gas slid 2 percent as Commodity Weather Group LLC in Bethesda, Maryland, said the weather may be normal or cooler than average in most of the lower-48 states through Aug. 23. A government report yesterday showed that inventories were 0.7 percent above the five-year average in the week ended Aug. 2, rising to a surplus for the first time since March.
“The weather is pretty mild everywhere except in Texas,” said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami. “The inventory situation is definitely bearish and we’re probably going to continue to see some larger-than-normal injections into storage.”
Natural gas for September delivery fell 6.7 cents to settle at $3.23 per million British thermal units on the New York Mercantile Exchange, the lowest closing price since Feb. 15. Trading volume was 22 percent above the 100-day average at 2:54 p.m.. Prices have dropped 3.6 percent this year and declined 3.5 percent this week.
The discount of September to October futures widened 0.3 cent to 2.7 cents.
September $2.75 puts were the most active options in electronic trading. They were 0.1 cent higher at 0.2 cent per million Btu on volume of 1,163 at 3:10 p.m. Puts accounted for 46 percent of trading volume. Implied volatility for at-the-money options expiring in September was 31.85 percent at 3 p.m., compared with 31.7 percent yesterday.
A U.S. supply increase of 96 billion cubic feet in the week ended Aug. 2 included about 14 billion that was reclassified from base gas to working gas, the Energy Information Administration said in a report yesterday. Analysts expected a gain of 79 billion. The five-year average injection for the week was 42 billion.
Inventories were 9.2 percent below year-earlier inventories, compared with 11.5 percent in last week’s report. Working gas includes supplies available for delivery, while base gas is used to maintain adequate pressure.
The number of rigs drilling for natural gas fell by two this week to 386, according to data released today by Baker Hughes Inc. in Houston. The total is down 10 percent this year.
Gas near $3 may boost demand from power plants switching from pricier coal, said Shiyang Wang, an analyst at Barclays Plc in New York, in a note to clients today. The futures may rise to $3.50 or $4 per million Btu as the weather returns to normal, Barclays said.
“We believe coal-to-gas displacement can vary by as much as 1.5-2 Bcf/d as prices swing from high-$3 to low-$3 levels,” Wang said in the report.
The high in New York on Aug. 18 may be 76 degrees Fahrenheit (24 Celsius), 7 lower than usual, according to AccuWeather Inc. in State College, Pennsylvania. Temperatures in Chicago may reach 75 Fahrenheit, 7 less than average.
Power generation accounts for 32 percent of U.S. gas demand, according to the EIA, the Energy Department’s statistical arm.
Lower-48 state natural gas output was little changed in May as new wells began operating in the Northeast’s Marcellus shale formation while Wyoming production declined during scheduled maintenance, government data showed.
Gross gas production in the contiguous states totaled 73.37 billion cubic feet a day, compared with a revised 73.38 billion in April, the EIA’s monthly EIA-914 report showed July 31.
The U.S. met 87 percent of its own energy needs in the first four months of 2013, on pace to be the highest annual rate since 1985, according to EIA data.
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