Natural Gas Futures Drop as Warmer Weather to Cut Demand

Natural gas futures rose for the second time in three days after a government forecast showed cooler weather in late October.

Gas gained 0.2 percent. A midday update from the National Weather Service showed cooler weather in the Midwest this week and in the Northeast over the next 11 to 15 days, said Dan Leonard, a senior meteorologist with Weather Services International in Andover, Massachusetts. Gas rebounded from a 2 percent drop based on earlier forecasts for mild weather.

“We are starting to get very cold temperatures,” said John Woods, president of JJ Woods Associates and a New York Mercantile Exchange floor trader. “Weather for October and November will drive this market.”

Natural gas for November delivery rose 0.7 cent to settle at $3.403 per million British thermal units on the Nymex. Prices advanced to $3.546 on Oct. 2, the highest intraday price since Dec. 8. The futures are up 14 percent this year.

January $4 calls, bets that prices will rise, were the most active options in electronic trading. They rose 0.6 cent to 18.4 cents per million Btu on volume of 860 contracts at 4:08 p.m.

Gas had declined after the Weather Service predicted above-normal temperatures from Oct. 15 through Oct. 21 for most of the lower 48 states. While the weather will still be warmer-than-normal in the Midwest next week, temperatures won’t get as high as previously predicted, Leonard said.

Cooler Weather

The low temperature in Chicago on Oct. 19 may dip to 39 degrees Fahrenheit (4 Celsius), 6 below normal, and Minneapolis may be 1 below normal at 38 degrees, according to AccuWeather Inc. in State College, Pennsylvania.

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

The weather outlook update was based on the global forecast system, which is the least sophisticated of the government’s models, said Tim Evans, an energy analyst at Citi Futures Perspective in New York. Evans said he will be looking for corroboration from other models.

The larger trend for above-average temperatures across much of the U.S. into late October will “keep us on track to record storage” levels by the end of the month, Evans said.

Stockpile Report

U.S. inventories totaled 3.653 billion cubic feet in the week ended Sept. 28, 8.3 percent above the five-year average for the period, the department said last week.

The supply surplus has dropped from a six-year high of 61 percent in March on record gas demand from electricity generators. Power plants will burn 25.21 billion cubic feet a day this year, up 21 percent from 2011, on stronger demand because of an unusually hot summer and a switch from costlier coal, the department said in its Sept. 11 Short-Term Energy Outlook.

The department expects stockpiles to reach an all-time high of 3.95 trillion cubic feet by the end of October before demand rises with colder weather. U.S. output will increase 4 percent this year from 2011 to average a record 68.86 billion cubic feet a day, the report showed.

Bank of America Corp. raised its 2013 gas outlook to $3.75 per million Btu from $3.50 as the market “rebalanced quickly” when the supply glut was reduced this summer, Sabine Schels, a London-based analyst with the bank, said in a note to clients today. Further gains will be capped by power generators switching back to coal and the need for consumption to catch up with higher production, Schels said.

Gas futures volume in electronic trading on the Nymex was 274,085 as of 3:36 p.m., compared with the three-month average of 380,000. Volume was 426,882 on Oct. 5. Open interest was 1.18 million contracts. The three-month average is 1.11 million.

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

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