Natural Gas Drops as Warmer U.S. Weather May Limit Fuel Demand

Natural gas dropped in New York for the third time in four days on speculation that easing U.S. cold may limit demand for the heating fuel.

Gas slid 0.8 percent after midday government forecasting models showed warmer weather for the Midwest next week, with temperatures nearing 10-year averages. Prices rose as much as 1.1 percent earlier as analysts predicted a government report tomorrow will show a near-record inventory drop.

“We definitely hear the weather is warming up in some parts of the country,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “We are seeing moderating temperatures, but we do have a record drawdown in inventory tomorrow, so we are fighting that balance here.”

Natural gas for January delivery fell 3.6 cents to $4.251 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Dec. 10. Trading volume was 4.2 percent below the 100-day average at 2:59 p.m. Gas is up 27 percent this year.

The discount for January futures to February widened 0.6 cent to 2.3 cents. March gas traded 14.4 cents above the April contract, compared with 14.1 cents yesterday.

March $2.80 puts were the most active options in electronic trading. They were unchanged at 0.1 cent per million Btu on volume of 4,100 at 3:28 p.m. Puts accounted for 57 percent of trading volume.

Warmer Weather

The midday forecast models showed that cold air from Canada will be limited to the very northern regions of the Midwest and the Northeast next week instead of sweeping farther south, said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York.

“Generally the warmer bias for the Midwest, whereby the cold outbreaks are now anticipated to be short-lived, encouraged the late-day selling,” she said.

Commodity Weather Group LLC in Bethesda, Maryland, predicted that “impressive warming” will boost temperatures from the Northeast through Texas over the next five days before cooler readings return from Dec. 23 through Jan. 1.

The high temperature in Washington on Dec. 20 may climb to 56 degrees Fahrenheit (13 Celsius), 10 above normal, before dropping to a seasonal 44 on Jan. 1, according to AccuWeather Inc. in State College, Pennsylvania. Chicago’s high will drop to 21 degrees on Dec. 23, 12 lower than average, before climbing to 35 degrees, 2 above normal, four days later.

About 49 percent of U.S. households use gas for heating, says the EIA, the Energy Department’s statistical arm. The heating season from November through March is the peak-demand period for the fuel in the lower 48 states.

EIA Report

Gas inventories probably fell by 264 billion cubic feet last week, based on the median of 20 estimates compiled by Bloomberg. That would be the biggest withdrawal for December and the second-largest ever after the record 274 billion in January 2008, based on EIA data going back to 1994.

Survey estimates ranged from decreases of 220 billion to 280 billion. Supplies fell 70 billion in the same period last year and the five-year average for the week is a 133-billion drop. The government is scheduled to release its weekly gas inventory report tomorrow.

U.S. inventories totaled 3.533 trillion cubic feet in the seven days ended Dec. 6, 7.2 percent below year-earlier levels and 3 percent below the five-year average, EIA data show.

“The weather forecasts are of intense focus at the moment, and the most recent have turned somewhat supportive again,” John Kilduff, partner at Again Capital LLC and editor of the Energy OverView newsletter in New York, wrote today.

Prices need to power through resistance at $4.35 to revive the rally, he said. “A run at $5 remains on the table and it is worth playing for, at this point.”

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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