Natural Gas Drops as Mild U.S. Weather to Crimp Heating Demand
Natural gas futures declined for a second day in New York as forecasts for mild weather signaled reduced demand for the heating fuel.
Gas fell 1.4 percent after forecasters including Commodity Weather Group LLC predicted above-normal temperatures for the East Coast over the next six to 10 days. Heating demand in the lower 48 states will be 42 percent below normal Oct. 22 through Oct. 26, said Weather Derivatives in Belton, Missouri.
“The spotlight is on the mild weather forecasts for the next couple of weeks,” said Brad Florer, a trader at Kottke Associates LLC in Louisville, Kentucky. “Fair value is somewhere right around where we are right now. We might see a bit of a tug of war.”
Natural gas for November delivery fell 4.9 cents to $3.437 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Oct. 8. The futures have dropped 7.2 percent from a year ago.
February $5.50 calls were the most active gas options in electronic trading. They were unchanged at 1.1 cents per million Btu on volume of 6,150 contracts as of 3:04 p.m. Calls accounted for 70 percent of options volume.
The low temperature in Boston on Oct. 23 may be 54 degrees Fahrenheit (12 Celsius), 10 above normal, and Washington may see a low of 59 degrees, 11 above normal, according to AccuWeather Inc. in State College, Pennsylvania.
The forecasts over the next six to 14 days are “much less bullish” than they were about a week or so ago, especially in the Midwest and Northeast, Dominick Chirichella, senior partner at the Energy Management Institute in New York, said in a note to clients today.
While demand for gas as a heating fuel is “heading for a lull after an early winter burst” in the coming weeks, a more winter will result in 20 percent more heating demand than last year, he said.
The winter of 2012-2013, spanning November through March, was the fourth warmest in U.S. record. About 50 percent of U.S. households use gas for heating, Energy Department data show.
The discount for November futures versus December contracts gained 4.8 cents to 33 cents, the widest since May 15.
U.S. stockpiles will enter the heating season at record levels, according to the Energy Department. Supplies totaled 3.725 trillion cubic feet in the week ended Oct. 5 and may reach an all-time high of 3.903 trillion by the end of the month, department estimates show.
A supply surplus to the five-year average for the week ended Oct. 5 narrowed to 7.8 percent from a six-year high of 61 percent at the end of March, department data show.
Power plants have been burning a record amount of the fuel as prices fell below the cost of coal in many U.S. regions. Demand from electricity generators will average 25.36 billion cubic feet a day this year, up 22 percent from 2011, the department said in its Oct. 10 Short-Term Energy Outlook.
Gas prices trading well above $3 will “leak demand to coal for power generation,” Mike Fitzpatrick, editor of the Energy OverView newsletter in New York, wrote today. Higher prices are possible for futures as long as gas holds technical support at $3.327, he said.
Buying gas after it dips appears to be an accepted strategy “but this will lead to successive overvaluations, making violent corrections more likely than uninterrupted runs higher,” Fitzpatrick said.
Gas futures volume in electronic trading on the Nymex was 325,670 as of 2:44 p.m., compared with the three-month average of 395,000. Volume was 372,531 yesterday. Volume was 383,309 on Oct. 12. Open interest was 1.19 million contracts. The three- month average is 1.11 million.
The exchange has a one-business-day delay in reporting full volume and open interest data.
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