Natural Gas Caps Quarterly Decline as Mild Weather Cuts Demand

Natural gas futures fell to the lowest price in almost four months, capping the first quarterly drop since March 2012, on speculation that lower-than-average temperatures will limit demand.

Gas fell 0.5 percent as Central and Southeastern states may see below-normal readings next week while “intense heat” is limited to Western states, according to MDA Weather Services in Gaithersburg, Maryland. Gas dropped 11 percent in June as supply increases topped average gains for four consecutive weeks.

“We’ve got spurts of heat and ideally for the bullish case you want to see hot weather over most of the large gas-consuming states,” said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami. “Some of the Western states are going to get some pretty good heat, so we will see if that can resurrect the markets.”

Natural gas for August delivery fell 1.7 cents to $3.565 per million British thermal on the New York Mercantile Exchange, the lowest settlement price since March 6. Trading was 27 percent below the 100-day average at 2:36 p.m. Prices declined 11 percent this quarter and are up 6.4 percent this year.

The discount of August to October futures narrowed 0.4 cent to 0.7 cent. The discount for October to January, a proxy for winter heating demand, narrowed 0.4 cent to 32.7 cents.

Gas Options

August $3.50 puts were the most active options in electronic trading. They rose 0.1 cent to 9.2 cents per million Btu on volume of 1,231 at 2:56 p.m. Puts accounted for 72 percent of trading volume. Implied volatility for at-the-money options expiring in August was 31.76 percent at 2:45 p.m., compared with 31.82 percent yesterday.

The high temperature in Dallas on July 2 will be 88 degrees Fahrenheit (31 Celsius), 6 below normal, while Chicago will be 12 degrees lower than average at 74, according to AccuWeather Inc. in State College Pennsylvania.

“While the main forecasts are not displaying much in the way of cooling demand, a bout is inevitable,” John Kilduff, partner at Again Capital LLC and editor of the Energy OverView newsletter in New York, wrote today. “From here, prices are more vulnerable and more likely to experience demand spikes from cooling demand.”

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.

Production Report

Gross gas output in the lower 48 states rose 0.8 percent to 73.24 billion cubic feet a day in April from the previous month, the most since November, according to the monthly EIA-914 report, released today. Total daily U.S. production increased 0.6 percent to 82.69 billion.

Several operators reported new wells at the Marcellus and Niobrara shale deposits, as well as in Texas and New Mexico, the government said. Gulf of Mexico output gained “as maintenance and pipeline issues from previous months were resolved” while Louisiana dropped amid maintenance and normal well decline, the EIA said.

Marketed production, which doesn’t include amounts flared or used to pressure wells, will expand 1.2 percent this year to average a record 70.01 billion cubic feet a day, the EIA said in its June 11 Short-Term Energy Outlook.

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