The natural gas market in New York is contracting as prices head for the first three-year drop on record, helping to expand trading in heating oil.
Open interest in gas futures and options has fallen to the lowest level in more than five years, while heating oil contracts have jumped to the most since at least 1995, according to data from the Commodity Futures Trading Commission. Gas has tumbled 52 percent since 2007, the most recent year in which the fuel gained on the New York Mercantile Exchange.
Rising gas output is curbing the price swings that traders seek to boost returns at the same that the prospects of a U.S. economic rebound are driving fluctuations in heating oil, which is refined from crude. Production of gas in the U.S., intensified by shale drilling, may jump 2.5 percent this year, according to the Energy Department. Supplies have been at a surplus to the five-year average every week but one since August 2008.
“Natural gas looks like it’s settled into a situation of structural oversupply,” said Antoine Halff, head of energy research at New York-based brokerage Newedge USA LLC. “The perception is that heating oil is a market subject to significant swings from being oversupplied or undersupplied.”
Gas for January delivery rose 7.4 cents, or 1.7 percent, to settle at $4.343 per million British thermal units today on the Nymex. Gas based on the contract closest to expiration ranged between $3.212 and $6.108 this year. Heating oil gained 4.9 cents, or 2 percent, to $2.4546 a gallon. The front-month contract fluctuated between $1.8272 and $2.4571 this year.
Open interest, or the number of contracts or options that haven’t been closed or delivered, in gas futures and options fell to 828,690 contracts as of Nov. 23, down 44 percent from September 2006, according to CFTC data. For heating oil, it was 425,071, close to the 15-year high of 449,980 set on Oct. 5.
Heating oil, a so-called middle distillate of crude, is advancing amid signs the U.S. economic recovery is gathering pace, spurring demand for raw materials. Oil will trade at $110 a barrel in 2012, Goldman Sachs Group Inc. said yesterday. Morgan Stanley forecasts it will climb to $100 a barrel next year. It settled at $88 a barrel, a two-year high, on the Nymex today.
Manufacturing in the U.S. expanded for a 16th straight month in November, a report yesterday from the Institute for Supply Management showed. Industrial production also grew in the U.K. and China, according to separate reports.
“Since 2008, there’s been a view that distillates can be closely tied to economic growth,” said Halff. “The distillates market has also become globalized in new ways, whereas the natural-gas market has been de-globalized because of shale supplies.”
Production from shale wells, in fields where rock formations are fractured and injected with water, sand and chemicals to release trapped gas, will account for 34 percent of U.S. output in 2035, doubling from 17 percent in 2008, according to the Energy Department in Washington. Proven reserves rose in 2009 to the highest level since 1971, the department said in a report on Nov. 30. Gas in storage reached a record 3.843 trillion cubic feet in the week ended Nov. 12.
“When you see the oversupply we have in natural gas and you see the production levels, you think: what’s going on here?” said Mike Rose, the director of energy trading for Angus Jackson Inc. in Fort Lauderdale, Florida. “Producers are still drilling at a breakneck pace.”
Inventories of the fuel in the week ended Nov. 19 were 9.5 percent above the five-year average, compared with 9.3 percent the previous week, the Energy Department said on Nov. 24. Supplies of distillate fuel have dropped 10 percent from a 27-year high of 176 million barrels reached in August, a department report showed yesterday.
“Natural gas used to be the widowmaker, where if supply declined prices could go to $10 or $15,” said Charlie Katz, a partner and natural-gas trader with First New York Securities LLC in New York. “With all the production we have now, people don’t see that sort of upside potential.”
Gas traded in New York will average $4 a million Btu in 2011, down from a previous forecast of $5.25, Goldman Sachs analysts led by Samantha Dart in London said yesterday. Bank of America Merrill Lynch said Nov. 23 it sees “downside risks” to a forecast of $5 for next year.