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Natural Gas Falls to 10-Yeare Low Before Inventory Report

April 19 (Bloomberg) -- Natural gas futures closed at the lowest price since September 2001 after a government report showed little change to a U.S. inventory surplus.

Gas declined 2.3 percent after the Energy Department said U.S. stockpiles expanded by 25 billion cubic feet last week to 2.512 trillion, matching analyst estimates compiled by Bloomberg. A surplus to the five-year average for the week narrowed to 58 percent from 59 percent the previous week. Supplies increased 42 billion cubic feet a year earlier.

“Nothing’s really new as far as guidance for the market,” said Dominick Chirichella, senior partner at the Energy Management Institute in New York. “I expect to see this market slowly drifting lower until there is some sign that producers are going to cut production. Until then, I think we could cut another 25 or 40 cents.”

Gas for May delivery fell 4.4 cents to $1.907 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Sept. 26, 2001. Gas has fallen 55 percent over the past year, making it the worst performer on the Standard & Poor’s GSCI index of 24 commodities.

May $2 calls, bets that prices will rise, were the most active options in electronic trading on the exchange. They fell 1.7 cents to 1 cent per million Btu on volume of 1,128 contracts at 2:44 p.m. June $1.75 puts rose 0.2 cent to 3.2 cents on volume of 516.

The price discount, or spread, of the May contract to June futures narrowed 0.3 cent 8.8 cents. The June contract dropped 4.7 cents to $1.995, settling below $2 for the first time.

Gas at $2

“The $2 threshold is now a level of resistance rather than a level of support,” Kent Bayazitoglu, an analyst at Gelber & Associates in Houston, said in a note to clients today.

An average of futures prices covering the winter heating season from November 2012 through March 2013, broke below $3 for the first time, signaling that “many gas producers will see yet another winter of at- or below-cost production,” he said. The seasonal strip fell to $2.973 per million Btu at 3:26 p.m. from a 2012 intraday high of $3.872 on Jan. 5.

“The market is really weighed down by record storage and production levels and minimal season demand,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Record production levels of gas have not been materially affected by drilling cutbacks, as far as we can see.”

Gas Drilling

The number of rigs drilling for gas in the U.S. fell 23 last week to 624, the lowest level since April 2002, according to Baker Hughes Inc.

The allure of higher prices from oil and other liquids from reserves that also produce natural gas “will offset losses” from lower dry gas drilling, Teri Viswanath, director of commodities strategy at BNP in New York, said in a note to clients yesterday. She cut her 2012 forecast for gas futures to $2.34 per million Btu from $2.70 in January.

Marketed gas production will rise 4.5 percent this year to average 69.22 billion cubic feet a day, the Energy Department said in its Short-Term Energy Outlook on April 10.

The fourth-warmest winter on record in the U.S. crimped demand for the heating fuel and contributed to a supply surplus since September. Gas use typically slumps after the winter heating season and before hot weather drives demand from power plants to run air conditioners.

Mild Weather

Temperatures will be normal along both U.S. coasts and above normal in the rest of the lower 48 states over the next six to 10 days, according to MDA EarthSat Weather in Gaithersburg, Maryland.

Demand for heat in the U.S. will be 33 percent below normal on April 25 through 29 and national cooling demand will be 1 percent below normal during the same period, according to Weather Derivatives in Belton, Missouri.

About 51 percent of U.S. households use gas for heating, according to the Energy Department.

Power generators will use 16 percent more gas this year to average a record 24.15 billion cubic feet a day, “primarily driven by the increasing relative cost advantages of natural gas over coal” in some regions, the department said in the outlook. Gas use by power generators will drop 3.4 percent next year amid higher prices.

“Even though there have been incremental increases in demand, it’s not enough to absorb additional supply,” said Jason Schenker, president of Prestige Economics LLC, in a telephone interview from Los Vegas. “We are at the beginning of the injection season. We run the risk of being at a point this summer where we are essentially at full storage.”

Gas futures volume in electronic trading on the Nymex was 319,176 as of 2:47 p.m., compared with the three-month average of 397,000. Volume was 300,132 yesterday. Open interest was 1.3 million contracts, down 0.6 percent after rising to records for four straight days. The three-month average is 1.23 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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