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Natural Gas Posts Biggest Quarterly Drop in Two Years on Glut

March 30 (Bloomberg) -- Natural gas futures dropped for a fifth day in New York, capping the biggest quarterly loss in two years, as weak fuel demand and record production contributed to a ballooning stockpile surplus.

Gas fell 1.1 percent to a 10-year low. U.S. stockpiles last week were 59 percent above the five-year average, the Energy Department said yesterday. Production rose in January, led by gains in the Marcellus shale formation in the Northeast, a separate report showed. Demand for the heating fuel was crimped during the quarter by the mildest winter since 2000.

“We have a pretty understandable bearish combination,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “Production’s up, demand’s down, the weather is mild, heating requirements are low and inventories are at a record high level for this time of the year.”

Natural gas for May delivery declined 2.3 cents to $2.126 million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Feb. 6, 2002. The futures fell 29 percent for the quarter and 19 percent in March.

May $2 puts, bets that prices will fall, were the most active options in electronic trading on the exchange. They were unchanged at 5.7 cents per million Btu on volume of 596 contracts at 4:13 p.m.

The price discount, or spread, of the May contract to June futures widened 1.2 cents to 13.3 cents.

U.S. gas stockpiles in the week ended March 23 rose by 57 billion cubic feet, the largest gain for the month since 2007, yesterday’s Energy Department report showed. Supplies were 59 percent above the five-year average for the week, the biggest gap since April 2006.

Gas Surplus

Winter in the lower 48 states was the fourth-warmest on record, with an average temperature of 36.8 degrees Fahrenheit (2.7 Celsius), the National Climatic Data Center said March 7.

U.S. gas output increased by 0.8 percent in January to 83.17 billion cubic feet a day from the previous month, the Energy Department said in its monthly EIA-914 report yesterday. The gains were led by production in the Marcellus shale formation in the Northeast.

Output in the lower 48 states climbed to 72.85 billion cubic feet a day from a revised 72.49 billion. The report covers gas gross withdrawals, which include gas that’s flared and used for repressuring.

The number of rigs drilling for gas rose by six this week to 658 after dropping last week to the lowest level since May 2002, a Baker Hughes Inc. report today showed. It was the first gain in 12 weeks.

Seasonal Low

Gas consumption typically declines to a yearly low during the months after the winter heating season ends and before hot weather drives up demand for the fuel from power plants to run air conditioners.

“There’s nothing out there that points to any increase in demand and the supply situation doesn’t change,” said Brad Florer, a trader at Kottke Associates LLC in Louisville, Kentucky. “You are going to need a hot summer and you are going need some significant change in production.”

Demand for heat in the U.S. was 17 percent below normal during the winter season through March 24 and will be 27 percent below normal for the week ending April 6, according to Weather Derivatives in Belton, Missouri.

Temperatures across most of the U.S. will be normal or above normal through April 8, according to MDA EarthSat Weather in Gaithersburg, Maryland. About 51 percent of U.S. households use gas for heating, according to the Energy Department.

Heading Toward $2

The low in St. Louis on April 6 may be 50 degrees Fahrenheit (10 Celsius), 9 above normal, and temperatures may be 2 above normal in New York City at 44 degrees, according to AccuWeather Inc. in State College, Pennsylvania.

Gas futures are probably heading toward $2, according to Chris Kostas, senior power and gas analyst for Energy Security Analysis Inc. in Andover, Massachusetts.

“The continued collapse of prices this week below well-established support at $2.23 per MMBtu is troubling from a technical standpoint,” Kostas said in an e-mail. There is “psychological” support at $2, though a meaningful rally may take time to develop given the drop to 10-year lows this week, he said.

Gas futures volume in electronic trading on the Nymex was 292,707 as of 3:48 p.m., compared with the three-month average of 398,000. Volume was 352,263 yesterday. Open interest was 1.24 million contracts, compared with the three-month average of 1.19 million.

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

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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