Natural Gas Futures Drop to Two-Week Low on Retreating Cold

Natural gas futures slid to a two-week low in New York, capping the second straight weekly decline, as the outlook for milder weather signaled easing heating-fuel demand.

Gas dropped 3.2 percent as forecasters including Commodity Weather Group LLC said below-normal temperatures across most of the lower 48 states through Feb. 16 will give way to more seasonal readings from Feb. 17 through Feb. 21. Gas inventories ended January at the lowest level for the month in a decade, preliminary government data released yesterday showed.

“The weather that drove us up to these higher prices is ripping away and you are now faced with moderating temperatures,” said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami. “The market will be keenly looking at storage levels at the end of March. We’ve drawn so much gas out of storage, we’ve got to put it all back during the injections season. That’s going to put upward pressure on summer prices.”

Natural gas for March delivery fell 15.6 cents to $4.775 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Jan. 23. Volume was 31 percent above the 100-day average at 2:51 p.m. The futures fell 3.4 percent this week, dropping for the fifth time in seven weeks, and are up 13 percent this year.

March gas traded 25.9 cents above the April contract, compared with 36.9 cents yesterday.

Options Trading

March $4.50 puts were the most active options in electronic trading. They were 1.5 cents higher at 10.5 cents per million Btu on volume of 1,574 at 3:27 p.m. Puts accounted for 39 percent of trading volume.

Implied volatility for March at-the-money options was 63.57 percent at 3:15 p.m., compared with 71.12 percent yesterday and 31.64 percent for the front-month contract a month ago. Gas is the most volatile component in the Standard & Poor’s GSCI gauge of 24 commodities.

“The big question posed by the drop in prices over the past few days is whether winter is effectively over,” Tim Evans, an energy analyst at Citi Futures in New York, wrote in a note to clients today. While the lowest temperatures and the biggest storage withdrawals of the heating season may already have happened, low stockpiles may “still squeeze prices higher,” he said.

A snowstorm in the eastern U.S. this weekend will bring snow showers with little accumulation, said Rob Carolan, owner of Hometown Forecast Services Inc. in Nashua, New Hampshire.

Weekend Storm

A weather system will pass through the South before exiting into the Atlantic tomorrow after leaving Washington with a half-inch (1.3 centimeters) of snow, according to the National Weather Service. A second storm heading into the Northeast may bring light snow to New York and Boston.

“This weekend’s blockbuster storm has failed to materialize, but late next week has another chance at a snow dump,” John Kilduff, partner at Again Capital LLC and editor of the Energy OverView newsletter in New York, wrote today. “The next several days will have the New York region experiencing temperatures some 10 degrees below normal, and the jet stream setup has the conga line of storms flowing across the country.”

The direction of gas prices remains lower, with the risk of “violent upward lurches” based on swings in the weather, he said.

Price Direction

The high temperature in Chicago on Feb. 10 may be 9 degrees Fahrenheit (minus 13 Celsius), 25 below normal, before climbing to 50 degrees, 13 higher than average, on Feb. 20, according to AccuWeather Inc. in State College, Pennsylvania. About 49 percent of U.S. households use gas for heating with the biggest consumers in the Midwest, followed by the Northeast, according to the U.S. Energy Information Administration, the statistical arm of the Energy Department.

Gas inventories fell by 262 billion cubic feet to 1.923 trillion cubic feet in the week ended Jan. 31, more than the five-year average drop of 151 billion for the period, the EIA reported yesterday. Supplies ended January at the lowest level for the month since 2004, the preliminary weekly data showed.

The gas-rig count declined by 7 this week to 351, the least since the seven days ended June 21, Baker Hughes Inc. data today showed. The total is down 17 percent from a year ago.

U.S. production will increase in 2014 for the seventh consecutive year as new wells come online at shale deposits such as the Marcellus in the Northeast, the EIA said in its Jan. 7 Short-Term Energy Outlook. Marketed output will increase 2.1 percent to 71.66 billion cubic feet day.

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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