Natural Gas Drops Most in Two Weeks on Seasonal Slump in Demand

Sept. 23 (Bloomberg) -- Natural gas posted the biggest one-day drop in more than two weeks in New York on speculation that mild weather will reduce demand for the fuel, accelerating stockpile gains.

Gas declined 2.3 percent, the most since Sept. 5, as forecasts showed seasonal weather across most of the lower 48 states from Sept. 28 through Oct. 2, with some higher readings in the Midwest, according to Commodity Weather Group LLC in Bethesda, Maryland. An unusually hot end to summer slowed inventory gains over the past month.

“It’s a neutral weather scenario and it’s putting pressure on the market as a result,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “If you don’t get some unexpected pluses or minuses to your forecasts, the market will generally drift lower on demand destruction.”

Natural gas for October delivery slid 8.5 cents to $3.602 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Sept. 11. Trading was 24 percent below the 100-day average at 2:34 p.m. Prices are up 7.5 percent this year and 1 percent for the quarter.

The discount of October to November futures narrowed 0.1 cent to 7.5 cents. October gas traded 33.9 cents below the January contract, compared with 33.7 cents on Sept. 20

Gas Options

November $3.70 calls were the most active options in electronic trading. They were 4.9 cents lower at 12.6 cents per million Btu on volume of 707 at 2:44 p.m. Calls accounted for 55 percent of trading volume. Implied volatility for November at-the-money options was 30 percent at 2:30 p.m., compared with 29.43 percent on Sept. 20.

The high in Washington on Oct. 1 may be 73 degrees Fahrenheit (23 Celsius), 1 lower than average, according to AccuWeather Inc. in State College, Pennsylvania. The high in Chicago will be 3 below normal at 66 degrees.

Power generation accounts for 32 percent of U.S. gas demand, according to the Energy Information Administration, the Energy Department’s statistical arm. Demand typically slumps in the fall, before fuel use peaks from November through March.

Gas inventories increased 46 billion cubic feet to 3.299 trillion in the week ended Sept. 13, below the five-year average gain of 74 billion for the period, the EIA said last week. It was the smallest stockpile gain for the time of year in data going back to 1994. A fuel surplus to the five-year average narrowed to 0.5 percent from 1.4 percent the previous week, the least since July.

Below Normal

Supplies probably expanded by 61 billion cubic feet last week, below the historical norm, amid warmer-than-normal weather and production losses because of flooding in Colorado, Tim Evans, an energy analyst at Citi Futures Perspective in New York, wrote in a note to clients today. The five-year average supply increase for the seven days ended Sept. 20 is 75 billion cubic feet, EIA data show.

Hedge funds raised bullish gas bets for a fifth straight week, the longest such streak since April, as a late-season hot spell eroded a surplus.

Money managers increased net-long positions, or wagers on rising prices, by 11,605 futures equivalents, or 4.3 percent, to 283,281 in the week ended Sept. 17, according to the Commodity Futures Trading Commission’s Sept. 20 Commitments of Traders report. Bullish bets advanced to the highest since July 23.

Speculators are unwinding some of those positions, contributing to downward pressure on the market today, Yawger said. Prices may slump with the bulls and bears staging a battle at $3.51, a technical support area, he said.

In the coming weeks, prices may slide to the $3.25 area, “but the start of the heating season may save the market from a more dramatic downside test,” Evans said.

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