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Natural Gas Declines on Outlook for Milder Eastern U.S. Weather

Natural gas futures dropped in New York for the first time in three days on speculation that milder late-August weather may reduce demand for the power-plant fuel.

Gas fell 1.5 percent as forecasters including MDA Weather Services in Gaithersburg, Maryland, said temperatures from the Northeast into Ohio will be seasonal or lower from Aug. 26 through Aug. 30. Earlier forecasts were for hotter weather. Gas stockpile gains have exceeded five-year averages in nine of the past 11 weeks amid lower fuel use.

“This second half of the summer, especially August, has been pretty cool,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “That has been the distinguishing factor that has allowed us to ratchet up the storage.”

Natural gas for September delivery declined 5.1 cents to settle at $3.368 per million British thermal units on the New York Mercantile Exchange. Trading volume was 44 percent below the 100-day average at 2:40 p.m. The futures rose 4.3 percent this week, capping the first gain in four weeks. Gas is up 0.5 percent this year.

The discount of September to October futures widened 0.1 cent to 2.5 cents. October gas traded 39.5 cents below the January contract, compared with 38.9 cents yesterday.

Gulf Weather

A ragged collection of rain showers off the Yucatan Peninsula may develop into a weak tropical system as it moves over the Gulf of Mexico, prompting some energy operations to evacuate non-essential personnel. The low-pressure area in the southwestern Gulf has a 50 percent chance of becoming tropical in the next two days, according to the U.S. National Hurricane Center in Miami.

Enbridge Inc. (ENB)’s Manta Ray offshore natural gas gathering company evacuated non-essential personnel from two platforms off Louisiana on Aug. 14. The Destin gas pipeline, owned by subsidiaries of BP Plc (BP/), reported similar evacuations at Gulf pipelines operated by BP, though gas will continue to flow as long as weather conditions permitted.

The hurricane center is also tracking Tropical Depression Erin, which is about 530 miles west of the Cape Verde Islands. Erin is expected to drift through the mid-Atlantic far from land before breaking up sometime next week.

Based on the most recent hurricane forecasts, “there’s not really anything to hang your hat on as far as natural gas is concerned,” Yawger said. The outlook that Erin will dissipate removes some support from prices seen earlier in the week, he said.

Gulf Production

Platforms in the Gulf will produce 5.7 percent of U.S. gas this year, according to EIA estimates.

The high temperature in New York City on Aug. 26 may be 71 degrees Fahrenheit (22 Celsius), 10 below normal, and Chicago’s reading may be 3 lower than the average at 78 degrees, according to AccuWeather Inc. in State College, Pennsylvania. Power plants account for 32 percent of U.S. gas use, Energy Information Administration data show.

Gas inventories last week expanded by 65 billion cubic feet last week to 3.006 trillion, above the five-year average of 42 billion for the seven days, according to the EIA, the statistical arm of the Energy Department. A stockpile surplus to the average widened to 1.5 percent from 0.7 percent the previous week.

The number of rigs drilling for gas rose by 2 this week to 388, Baker Hughes Inc. (BHI) data today showed. The count is up 11 percent since dropping to an 18-year low of 349 in the week ended June 21.

Production Rises

Gas production is headed for the sixth consecutive annual gain as drilling technologies, such as hydraulic fracturing, or fracking, have made it more economic to tap fuel trapped in shale rock. Output will climb 1 percent to average 69.89 billion cubic feet a day as new wells come online such as in the Marcellus shale in the Northeast, the EIA said Aug. 6 in its Short-Term Energy outlook.

October $4.20 calls were the most active options in electronic trading. They were 0.2 cent lower at 0.6 cent per million Btu on volume of 1,773 at 3:15 p.m. Calls accounted for 44 percent of trading volume. Implied volatility for at-the-money options expiring in September was 30.96 percent at 3:15 p.m., compared with 32.15 percent yesterday.

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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