Natural Gas Futures Drop on Outlook for Waning Summer Demand

Natural gas futures fell from a three-week high in New York on speculation that waning summer heat will reduce demand for the power plant fuel.

Gas declined 1.7 percent as parts of the East Coast will turn cooler in early September while the Midwest will see above-normal temperatures from Aug. 28 through Sept. 6, Commodity Weather Group LLC said. Hot weather helped prices jump 5.3 percent in the first four days of this week.

“We saw a pretty dramatic run-up through the week,” said Eric Bickel, an analyst at Schneider Electric in Louisville, Kentucky. “While it is warmer than expected over the next couple of weeks, we are in the back half of the summer peak.”

Natural gas for September delivery slid 6 cents, or 1.7 percent, to settle at $3.485 per million British thermal units on the New York Mercantile Exchange. Trading volume was 26 percent below the 100-day average at 3:01 p.m. Futures rose 3.5 percent this week, the second weekly gain, and are up 4 percent this year.

The discount of September to October futures widened 0.6 cent to 3.6 cents. October gas traded 37.8 cents below the January contract, compared with 37.9 cents yesterday

October $3 puts were the most active options in electronic trading. They were 0.2 cent higher at 0.8 cent per million Btu on volume of 1,011 at 2:48 p.m. Puts accounted for 53 percent of trading volume. Implied volatility for at-the-money October options was 31.11 percent at 2:45 p.m., versus 31.75 percent yesterday.

Market Outlook

“We sense that the market is cautious about testing much above the $3.50 level,” Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York, said in a client note today. “Waning air-conditioning demand could re-accelerate inventory restocking” while higher gas prices may prompt power producers to use coal instead, she said.

The high temperature in Atlanta on Sept. 6 may be 75 degrees Fahrenheit (24 Celsius), 9 below normal, according to AccuWeather Inc. in State College, Pennsylvania. Chicago’s high will be 10 above normal at 90 degrees on Sept. 2 before dropping four days later to 67 degrees, 12 lower than the average.

Tropical Storm Ivo formed in the Eastern Pacific, 330 miles (531 kilometers) south-southwest of Cabo San Lucas on Mexico’s Baja Peninsula, the U.S. National Hurricane Center said. The storm is expected to move parallel to the coast for at least five days, weakening to a depression tomorrow, the center said.

Labor Day

Gas prices may stay mostly below $3.50 through the Sept. 2 U.S. Labor Day holiday, with support at $3.20, said Jim Duncan, director of market research at ConocoPhillips Inc. in Houston.

“It’s got to weigh heavy on your mind because we are heading into a shoulder season” and the U.S. hasn’t had a hurricane-related disruption, he said.

Gas use at power plants fell 16 percent in June from a year earlier as prices gained, the Energy Information Administration said yesterday in its Electric Power Monthly report. Coal consumption rose 4.9 percent. Gas at the Henry Hub in Louisiana, the delivery point for New York futures, averaged $3.8254 per million Btu in June, up 56 percent from June 2012.

Electricity generation accounts for 32 percent of U.S. gas demand, according to the EIA, the Energy Department’s statistical arm.

U.S. inventory gains exceeded five-year averages in 10 of the past 12 weeks, though the pace of injections slowed in the previous two weeks as hotter weather spurred fuel use, EIA data show.

Supply Report

Stockpiles rose 57 billion cubic feet to 3.063 trillion in the week ended Aug. 16, exceeding the historic norm by 1 billion, an EIA report yesterday showed. A supply surplus to the five-year average held steady at 1.5 percent while a deficit to year-earlier levels narrowed to 7.2 percent from 7.7 percent the previous week.

The gas-rig count fell by 1 this week to 387, down 64 percent from the 10-year average. Baker Hughes Inc. data show. The total has dropped 10 percent this year.

U.S. marketed natural gas production will climb 1 percent this year to an all-time high of 69.89 billion cubic feet in the sixth consecutive annual gain, the EIA said in its Aug. 6 Short-Term Energy Outlook. Increases are being driven by shale deposits such as the Marcellus in the Northeast, the government said.

“We believe that production growth in the Marcellus should outpace last year’s level,” given infrastructure expansions, Shiyang Wang, an analyst with Barclays Plc in New York, said in note to clients today.

Output from unconventional wells in Pennsylvania averaged 7.84 billion cubic feet a day from January through June, up 2.89 billion from a year earlier, based on state government data, Wang said. The backlog of wells increased 114 from the second half of 2012 to 1,546.

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