U.S. Gas Traders Unfazed by First Summer Supply Drop in Decade

U.S. natural gas supplies fell for the first time in the summer in a decade. Traders aren’t impressed.

As the hottest weather in four years spread across the U.S. East Coast last week, people blasted their air conditioners, driving demand for gas so high that inventories fell 6 billion cubic feet last week to 3.288 trillion, government data show. Supplies have only declined twice before in the summer, both times in 2006. Futures, however, were little changed as traders focused on the potential for record stockpiles before the winter.

While gas has rebounded after tumbling to a 17-year low five months ago amid surging production from shale formations, inventories remain on course to reach an all-time high. As cooler weather accelerates stockpile gains, the surplus to normal levels may persist until the winter, keeping a lid on price gains.

“It is rather worrisome that restocking has generally outpaced 2012 levels, even though U.S. inventories have managed to come in lower than the prior-year and five-year averages for nearly a dozen weeks,” said Teri Viswanath, managing director for natural gas at PIRA Energy Group in New York.

Futures for September delivery dropped 0.5 cent to settle at $2.834 per million British thermal units on the New York Mercantile Exchange. Prices earlier rose as high as $2.885.

Waning Demand

The muted reaction by the market comes as high power demand for gas is poised to wane with the fading heat, Gene McGillian, manager of market research at Tradition Energy in Stamford, Connecticut, said by phone.

“Keep in mind we’re in the first week in August, and shoulder season is right around the corner,” when consumption of the fuel ebbs, McGillian said.

The abnormally high temperatures of last month had power plants burning the most gas ever, eating into the nation’s glut of inventories, based on PointLogic Energy data. Stockpiles are typically rising at this time of year as suppliers stock up for the winter heating season.

A supply surplus to the five-year average fell for the 17th week in the seven days ended July 29 to 16 percent, down from 54 percent in early April. Analyst estimates and a survey of Bloomberg users predicted an inventory drop of 2 billion cubic feet, compared with the five-year average gain of 54 billion for the period.

The market may be underestimating the rise in the nation’s demand for gas, said Phil Flynn, senior market analyst at Price Futures Group in Chicago.

“I think the market is in a little bit of denial,” Flynn said. “The bears are betting summer is ending, and forget the fact that we squandered the biggest supply surplus.”

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