Natural Gas Drops Most in Three Weeks on ‘Breakneck’ Output

Natural gas futures fell the most in three weeks on speculation that production will rise faster than demand as the end of the U.S. winter heating season nears.

Gas futures dropped 4.1 percent as U.S. output of the fuel advanced for the fifth consecutive month in December, the Energy Department reported yesterday. Temperatures may be above normal next week in eastern states, crimping demand for the heating and power-plant fuel.

“We’re producing at a breakneck pace, and we’re not using enough of it,” said Mike Rose, the director of energy trading at Angus Jackson Inc. in Fort Lauderdale, Florida. “Without the cold weather to give the market a bid, we’re going to be stuck in a range.”

Natural gas for April delivery fell 16.4 cents to settle at $3.873 per million British thermal units on the New York Mercantile Exchange, the biggest one-day decline since Feb. 7. The futures have dropped 17 percent from a year ago. Gas futures rose near the 100-day moving average of $4.1002 yesterday before paring gains.

U.S. gas production advanced 1.1 percent in December from November, according to the Energy Department’s monthly EIA-914 report. Output in the lower 48 states increased for a second month, advancing 0.2 percent to 66.76 billion cubic feet a day from a revised 66.6 billion.

“Production does still look pretty solid,” said Kyle Cooper, director of research for IAF Advisors in Houston. “We’re entering a lower demand period.”

Production in Louisiana gained 2.7 percent as drilling in the Haynesville Shale gas formation increased, according to the report.

Supply Report

The U.S. gas market may have excess supplies of about 1.6 billion cubic feet a day in 2011, said Pearce Hammond, an analyst with Simmons & Co. International in Houston, in a note to clients today.

Gas inventories dropped 81 billion cubic feet in the week ended Feb. 18 to 1.83 trillion cubic feet, the Energy Department said Feb. 24. A deficit to five-year average supplies for the week narrowed to 3.2 percent from 6.3 percent the previous week.

Analysts are predicting another below-normal withdrawal from gas inventories for the week ended Feb. 25. Department data may show stockpiles fell 90 billion cubic feet last week, according to the median of nine estimates compiled by Bloomberg. The five-year average withdrawal is 131 billion.

Weather Outlook

Temperatures may be above-normal in the Northeast and South from March 6 through March 10, according to MDA Federal Inc.’s EarthSat Energy Weather in Rockville, Maryland.

“In the East, the warmest conditions are expected early, but the warmth should continue through most of the period,” MDA meteorologists led by Travis Hartman said in a note to clients.

Heating demand in the Northeast may be 28 percent below normal levels on March 6, according to Weather Derivatives in Belton, Missouri.

The low in New York on March 9 may be 42 degrees Fahrenheit (6 Celsius), 9 degrees above normal, according to AccuWeather Inc. in State College, Pennsylvania. The low in Washington may be 45 degrees, 10 above normal.

About 52 percent of U.S. households use natural gas for heating, according to the Energy Department.

Gas futures volume in electronic trading on the Nymex was 258,553 as of 2:40 p.m., compared with the three-month average of 305,000. Volume was 258,922 yesterday. Open interest was 958,906 contracts. The three-month average open interest is 834,000. The exchange has a one-business-day delay in reporting open interest and full volume data.

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