Natural Gas Futures Decline on Outlook for Fading Cold Weather

Natural gas futures declined in New York on speculation that demand for the heating fuel will ease as a cold spell dissipates later this month.

Gas slid 2 percent as Commodity Weather Group LLC said frigid air over much of the U.S. in the next week will fade through Feb. 20. Varying outlooks on the weather and inventory levels have helped make gas futures the most volatile component in the Standard & Poor’s GSCI index of 24 commodities.

“The third week of February looks pretty bearish, where even in Chicago and the Midwest you are going to see below-normal heating demand for the first time in at least two months,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. “There is way too much volatility. We haven’t seen this in five or six years. That has people shell-shocked.”

Natural gas for March delivery fell 9.9 cents to settle at $4.931 per million British thermal units on the New York Mercantile Exchange. Volume was 30 percent above the 100-day average at 2:50 p.m. Futures are up 17 percent this year.

Intraday price swings in front-month futures have almost tripled in magnitude this year, averaging 30.19 cents a day versus the 2013 average of 10.86 cents. A high-low spread of 82.4 cents on Jan. 29 was the widest since September 2008.

March gas traded 36.9 cents above the April contract, compared with 48.4 cents yesterday.

March $7 calls were the most active options in electronic trading. They were 1.6 cents lower at 6.1 cents per million Btu on volume of 1,840 at 2:51 p.m. Calls accounted for 68 percent of trading volume.

Options Volatility

Implied volatility for March at-the-money options was 73.66 percent at 3 p.m., compared with 32.52 percent for the front-month contract a month ago.

The Energy Information Administration said U.S. inventories fell 262 billion cubic feet in the week ended Jan. 31 to 1.923 trillion, more than the five-year average drop of 151 billion.

The EIA revised the previous week’s stockpile total, cutting it by 8 billion cubic feet to 2.185 trillion. Analyst estimates showed an expected withdrawal of 274 billion while a survey of Bloomberg users predicted a decrease of 276 billion.

A deficit to the five-year average widened to a record 22.4 percent from 16.6 percent a week earlier. Inventories were 28.8 percent below year-earlier supplies, the widest since April 26.

The Northeast was struck by snowstorms twice this week and forecasters are gauging the possibility of another storm this weekend. Yesterday’s storm left 10.6 inches (27 centimeters) of snow at Boston’s Logan International Airport, according to the National Weather Service.

Chicago Weather

Weather systems may bring snow to Chicago on Feb. 8 and possibly to New York and Boston the next day, according to Bob Smerbeck, a senior meteorologist at AccuWeather Inc. in State College, Pennsylvania.

The low temperature in Chicago on Feb. 10 may drop to 1 degree Fahrenheit (minus 17 Celsius), 19 below normal, according to AccuWeather Inc. in State College, Pennsylvania. The low a week later will be 24 degrees, 2 higher than average.

About 49 percent of U.S. households use gas for heating, according to the EIA, the Energy Department’s statistical arm.

The volume of gas flowing from wellheads dropped by 750 million cubic feet yesterday to just below 72.2 billion, “with additional cold and snow surging across the U.S. landscape,” Luke Larson, an analyst at LCI Insight in El Paso, Texas, said in an e-mail today. The declines were from the San Juan and Permian producing basins along with other shut-ins in the Northeast, Rockies, mid-continent and the Gulf Coast, he said.

Production Cuts

Production has been reduced by 88.4 billion cubic feet since the first wave of frigid weather froze wells on Dec. 5, Larson said. Daily output that averaged 74.8 billion in November dropped to 73.5 billion in the following 68 days. Larson said.

“The recent string of cold weather this winter has left U.S. natural gas storage inventories nearing critical levels,” analysts at Credit Suisse Group AG said in a note to clients today.

The bank raised its first-quarter gas price forecast by 50 cents to $4.80 per million Btu and increased its 2014 estimate by 13 percent to $4.30, according to the note. Summer prices will need to sustain that $4.30 to increase stockpiles from a projected 1.1 trillion cubic feet at the end of March to 3.8 trillion before the next winter, Credit Suisse said.

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