Natural Gas Plunges to Lowest Since April 2012 on Mild Weather

  • The eastern U.S. may be warmer than usual through Nov. 10
  • BofA Merrill Lynch analysts lower winter price targets

Natural gas futures tumbled to the lowest since April 2012 as traders reacted to near-record inventories and mild weather that’s pushing back the start of winter demand for the heating fuel.

The eastern U.S. may be warmer than usual from Nov. 1 to Nov. 10, according to Commodity Weather Group. Stockpiles totaled 3.81 trillion cubic feet Oct. 16, 4.5 percent above the five-year average, according to a government report. Bank of America Merrill Lynch analysts lowered their year-end price target.

“The pressure is on here with the lack of weather and the storage situation,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. “It’s really gotten the attention of a lot of investors suddenly just how oversupplied we are.”

Natural gas for November delivery fell 22.4 cents, or 9.8 percent, to settle at $2.062 per million British thermal units on the New York Mercantile Exchange, the lowest since April 26, 2012. Futures touched $2.05 in the biggest intraday drop since February 2014. Volume was 90 percent above the 100-day average.

Price Drivers

Gas futures have slumped four days in a row and 18 percent this month. Prices are reacting to high stockpiles and the weather phenomenon known as El Nino, which is threatening to shrink demand for the fuel during the winter heating season.

Beyond that, the front-month contract will expire Wednesday and be replaced by December futures the next day. That’s creating a lot of “very short-term” trades right now, Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone.

Open interest on Friday was 32,389, about three times lower than Monday’s trading volume, according to data compiled by Bloomberg. “It doesn’t take that much selling to move the price lower,” Evans said.

Temperatures in Washington might reach 74 degrees Fahrenheit (23 Celsius) on Nov. 5, 12 degrees above normal, AccuWeather data show. The city’s low on that day could be 54 degrees, 10 above normal.

“A warm winter is the last thing this market needs,” BofA Merrill Lynch global research analysts including Sabine Schels and Max Denery said in a note to clients.

The analysts on Friday lowered their year-end target to $3 from $3.50, and their average fourth-quarter forecast to $2.70 from $3.20. A strong El Nino or extremely warm winter would “imply much weaker 4Q15/1Q16 prices than we currently project,” they wrote.

U.S. gas producers fell. The Bloomberg Intelligence index of natural gas production valuation peers dropped more than 4 percent for a loss year-to-date of 40 percent. The index has fallen 54 percent in a year.

Monday’s worst performer in the index, Magnum Hunter Resources Corp., slid as
much as 10 percent to 29 cents, its lowest price since April 2009. The shares
touched $9.27 on Feb. 24, 2014.

Chesapeake Energy Corp., the largest U.S. gas producer behind Exxon Mobil Corp., fell as much as 9.2 percent.

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