Natural Gas Drops as Inventory Decline Is Less Than Forecast

Natural gas futures slipped from a five-year high in New York after a government report showed an inventory decline that was less than analysts predicted.

Gas fell 1.4 percent after the U.S. Energy Information Administration said stockpiles dropped 250 billion cubic feet in the week ended Feb. 14 to 1.443 trillion cubic feet. The median of 24 analyst estimates compiled by Bloomberg showed a decline of 257 billion. Prices this week topped $6 for the first time since 2010 on forecasts for a surge of cold air following unusually mild weather this week.

“The report was slightly below expectations and this potential was already priced in,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. “Temperatures plunge again next week. This is a crazy winter. It’s still a very bullish number, but this weakness is certainly not something you want to sell into.”

Natural gas for March delivery slid 8.5 cents to settle at $6.064 per million British thermal units on the New York Mercantile Exchange after earlier rising to $6.40, the highest intraday price since Dec. 4, 2008. Trading volume was 44 percent above the 100-day average at 2:41 p.m. Prices are up 43 percent this year.

The premium of March to April contracts widened to $1.208, a record for this time of year. The spread was about 18 cents a month ago. The premium for April to October futures narrowed to 20.5 cents from 21.5 cents yesterday.

March $6.50 calls were the most active options in electronic trading. They were 11.9 cents lower at 15.3 cents per million Btu on volume of 2,853 at 3:28 p.m. Calls accounted for 76 percent of trading volume.

Record Gap

Today’s inventory report showed a decline that was bigger than the five-year average drop of 133 billion cubic feet. A deficit to the five-year average widened to a record 34 percent from 27 percent the previous week, today’s report showed. Supplies were 40 percent below year-earlier inventories.

Weather forecasts will cause price volatility through March but we expect end-March storage to come in at 1.1 trillion cubic feet, the lowest since 2004,” Adam Longson, a New York-based analyst for Morgan Stanley, said in an e-mailed report.

The market overestimates costs to refill storage and an average price of $4.35 per million Btu for the injection season “should be high enough to support adequate restocking by October,” Longson said. “Prices should trend lower through summer” and may fall below $4 in the third quarter, according to the report.

Weather Outlook

Above-normal temperatures across most of the lower 48 states this week will give way to a “powerful polar punch” in the Midwest from Feb. 25 through March 1, said Commodity Weather Group LLC in Bethesda, Maryland. The cold will also sweep the South and East Coast next week through March 8.

Chicago’s low on Feb. 27 will drop to minus 2 Fahrenheit (minus 19 Celsius), 27 below normal, while New York City will slide to 17 degrees, 14 lower than average, said AccuWeather Inc. in State College, Pennsylvania. About 49 percent of U.S. households use gas for heating, led by the Midwest and then the Northeast, data show from the EIA, the Energy Department’s statistical arm.

U.S. gas production will rise 2.2 percent this year to a record 71.76 billion cubic feet a day, the EIA said in its monthly Short-term Energy Outlook on Feb. 11. Output is expanding as new wells come online at shale deposits such as the Marcellus in the Northeast.

While the weather is supportive to gas prices for now, “there’s plenty of room on the downside,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “I don’t know if you can reasonably justify something much further beyond $6.40. I never thought it would get this far.”

The relative strength index, or RSI, topped 70 today, a level seen by some traders as a sell signal, he said. The RSI was 67.5 at 3:02 p.m.

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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