Natural Gas Drops to 16-Week Low on Above-Forecast Supply Gain

Natural gas futures tumbled to the lowest price in 16 weeks in New York after U.S. stockpiles increased more than forecast.

Gas fell 4.1 percent, the biggest one-day drop in three weeks, as the Energy Information Administration said inventories rose 95 billion cubic feet in the week ended June 21 to 2.533 trillion cubic feet. Analyst estimates compiled by Bloomberg showed a 90-billion increase. Supply gains have topped five-year averages for four straight weeks as mild weather reduced demand.

“Today’s inventory report is a reflection of the fact that we have very sluggish demand picture right now,” said Dominick Chirichella, senior partner at the Energy Management Institute in New York. “I don’t see a significant call on natural gas for power generation to meet cooling needs because cooling needs aren’t going to be all that high.”

Natural gas for August delivery dropped 15.5 cents to $3.582 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price for a front-month contract since March 7. Trading was 21 percent above the 100-day average at 2:57 p.m. Prices have fallen 11 percent since March, heading for the first drop in five quarters. The futures are up 6.9 percent this year.

The discount of August to October futures was steady at 1.1 cents.

August $3.50 puts were the most active options in electronic trading. They rose 4.5 cents to 9.1 cents per million Btu on volume of 2,455 at 3:23 p.m. Puts accounted for 74 percent of trading volume. Implied volatility for at-the-money options expiring in August was 31.61 percent at 3:15 p.m., compared with 31 percent yesterday.

Average Gains

The stockpile increase was bigger than the five-year average gain for the week of 79 billion cubic feet, according to the EIA, the Energy Department’s statistical arm. Supplies expanded by 58 billion a year earlier.

A deficit to the five-year average narrowed 1.2 percent from 1.9 percent the previous week. Inventories were 17.1 percent below year-earlier levels compared with 18.7 percent in last week’s report.

Gas prices have slumped 19 percent from a 21-month high of $4.444 per million Btu on May 1 as unseasonable heat was replaced by milder weather, limiting demand for the power-plant fuel to run air conditioners.

Above-normal temperatures along the Atlantic and Pacific coasts next week will bracket cooler weather in the middle of the country, according to MDA Weather Services. The Gaithersburg, Maryland-based forecaster predicted below-normal readings for Texas and neighboring states.

July Weather

The high in Boston on July 2 may be 85 degrees Fahrenheit (31 Celsius), 5 above normal, while St Louis may see 84 degrees, 4 below average, according to AccuWeather Inc. in State College Pennsylvania. Dallas’s high on July 5 will be 11 below normal at 84 degrees after surging to 104 tomorrow.

Power producers account for 32 percent of gas demand, according to the EIA. Texas consumed the most natural gas for generating electricity, averaging 18 percent of U.S. power-plant demand for the fuel over the past three years, according to Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York.

Marketed gas production will climb 1.2 percent to average a record 70.01 billion cubic feet a day this year as new wells come online at shale formations, such as the Marcellus in the Northeast, the EIA’s monthly report showed.

Gas futures plunged below the 200-day moving average, a key technical support level, at $3.639 per million Btu today for the first time since August. Prices tested the average yesterday before bouncing higher.

Summer Prices

“One of our rules is don’t go long natural gas after Memorial Day and don’t short gas after Labor Day, no matter what anybody says,” said Walter Zimmerman, chief technical strategist at United-ICAP, a brokerage in Jersey City, New Jersey.

On average, gas prices slide 35 percent from the May peak to the late August or early September low, based on historical data, he said.

Futures also dropped below a long-term support line that had been intact since gas slumped to a 10-year low of $1.902 in April 2012, Zimmerman said.

Gas may test the $3.40 support level as soon as next week and if futures break through that, they may spiral down to the next support area of $2.88, based on a 50 percent retracement of gains from the 10-year low to the May high, he said.

Before it's here, it's on the Bloomberg Terminal.