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Natural Gas Drops First Day in Three on Outlook for Supplies

May 2 (Bloomberg) -- Natural gas futures declined for the first time in three days in New York on speculation that rising supplies will exceed demand for the fuel.

Gas futures dropped as much as 1.3 percent on predictions of higher output after Baker Hughes Inc. said April 29 that the number of gas rigs drilling in the U.S. rose by four to 882 last week, the first increase in four weeks.

“At these prices, I think a lot of extra production is coming online,” said Gordy Elliott, a risk-management specialist at FC Stone LLC in St. Louis Park, Minnesota. “I think you’re going to see stockpiles increase and prices become a little bearish.”

Natural gas for June delivery fell 0.5 cent to settle at $4.693 per million British thermal units on the New York Mercantile Exchange. The futures have gained 6.5 percent this year. Prices earlier rose to $4.729, the highest intraday price since Jan. 24.

Natural gas settled April 29 with a Relative Strength Index of 72.65, the highest level since March 13, 2008, Pax Saunders, an analyst with Gelber & Associates in Houston, said in a note to clients today.

Some technical analysts use the index to track how rapidly prices gain or retreat. A reading above 70 suggests prices may fall.

The Energy Department reported April 29 in its monthly EIA-914 report that gas output in the lower 48 states slid 1.9 percent in February as cold weather disrupted drilling operations in Texas, New Mexico, Oklahoma and Wyoming.

U.S. Stockpiles

“Oversupply challenges still remain in 2011 driven by robust production, which we believe will be manifested in future 914 reports,” said Pearce Hammond, an analyst with Simmons & Co. International in Houston, in a note to clients today.

The report covers gas gross withdrawals, which include gas used for repressuring, quantities vented and flared, and non-hydrocarbon gas removed in treating or processing operations.

Total marketed gas production may grow 2.4 percent in 2011 to 63.3 billion cubic feet per day and by 0.8 percent in 2012, the department said April 12 in its Short-Term Energy Outlook.

Cooler-than-normal weather is likely in the central and southern U.S. through May 6, according to Commodity Weather Group in Bethesda, Maryland. The below-normal temperatures may reduce air-conditioner use, crimping the demand for gas from power plants.

Commodity Weather Group and MDA EarthSat Weather in Gaithersburg, Maryland, predict the cooling trend in Texas and parts of the western U.S. will moderate during the 6- to 10-day timeframe. Warmer-than-normal weather from eastern California to the southern half of the Mississippi Valley is likely from May 7 to May 11.

The high temperature in Dallas, Texas, on May 5 may be 79 degrees Fahrenheit (26 Celsius), 2 below normal, according to AccuWeather Inc. in State College, Pennsylvania.

Air Conditioning

U.S. cooling demand may be 48 percent below normal on May 5, said David Salmon, a meteorologist with Weather Derivatives in Belton, Missouri.

Power plants use 30 percent of the nation’s gas supplies, according to the Energy Department.

Gas futures volume in electronic trading on the Nymex was 250,411 as of 2:36 p.m., compared with the three-month average of 322,000. Volume was 309,033 on April 29. Open interest was 981,821 contracts. The three-month average open interest is 931,000.

The exchange has a one-business-day delay in reporting open interest and full volume data.

To contact the reporter on this story: Christine Buurma in New York at cbuurma1@bloomberg.net;

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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