Natural Gas Drops on Outlook for Fading February Cold Weather

Feb. 1 (Bloomberg) -- Natural gas declined in New York, capping losses for the second consecutive week, as cold weather at the start of February may fade by the middle of the month, cutting fuel demand.

Gas fell 1.1 percent as forecasters including MDA Weather Services said temperatures will be below normal in northern parts of the U.S. during the first five days of the month before turning milder through Feb. 15. The number of rigs drilling for gas has dropped to a seven-week low and a supply surplus expanded last week.

“After we get this little cold burst the forecasts suggest the return of milder weather, which will limit heating demand,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “We have really robust levels of gas. As far as production goes, people continue to watch for signs of the impact of drilling cutbacks. We have yet to see it.”

Natural gas for March delivery fell 3.8 cents to settle at $3.301 per million British thermal units on the New York Mercantile Exchange. Trading was down 16 percent from the 100-day average. The futures dropped 4.2 percent this week and are down 1.5 percent this year.

March $3 puts were the most active gas options in electronic trading. They were up 0.3 cent at 2 cents per million Btu on volume of 940 contracts at 3:33 p.m. Puts accounted for 50 percent of options volume.

Midday Weather

Gas retreated from early gains after a midday weather update showed that “there isn’t that much cold air up in Canada,” said Jim Southard, a meteorologist with Frontier Weather Inc. in Tulsa, Oklahoma. This lack of cold air will limit the potential for cold weather in the U.S. after mid-February, he said.

About 50 percent of U.S. households use gas for heating, according to the Energy Information Administration.

U.S. stockpiles totaled 2.802 trillion cubic feet in the week ended Jan. 28, the EIA said in a report yesterday. Supplies have fallen 1.106 trillion cubic feet in the first 13 weeks of the heating season that began in November, an increase of 35 percent from the year-earlier decline. Last winter was the fourth-warmest on U.S. record.

Inventories dropped 194 billion cubic feet last week, above the five-year average decline of 178 billion for the seven days. A deficit to year-earlier levels increased to 6.7 percent from 5 percent the previous week, the widest deficit for the time of year since 2008. A supply surplus to the five-year average rose to 12.2 percent from 12 percent.

Production Growth

Natural gas production in the lower-48 states rose to an all-time high in November as more of the fuel was pumped from shale formations in the Northeast and two gas plants returned to full production in Wyoming, the EIA said in a report yesterday.

“Ugh,” David Pursell, a managing director at analyst with Tudor, Pickering, Holt & Co. LLC in Houston, said in a note to clients today. He called it “frustrating” that onshore production is still growing but said that he is confident that U.S. output will decline by about 1 percent in 2013.

The number of rigs drilling for gas fell by 6 to 428 in the week ended today, the least since Dec. 14, according to Baker Hughes Inc. in Houston. The rig count is down 43 percent from a year ago.

The boom in oil and natural gas production helped the U.S. cut its reliance on imported fuel. America met 84 percent of its energy needs in the first 10 months of last year, government data show. If the trend continued through the end of 2012, it would be the highest level of self-sufficiency since 1991.

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