Natural-gas futures fell below $3 Friday for the first time in more than two years as mild weather and record production contributed to a growing stockpile surplus.
Gas capped a 32 percent annual drop, the biggest decline since 2006, as forecast for above-normal temperatures in January spurred speculation that inventories of the heating fuel will stay above average levels during the winter months, when demand is strongest.
“The bearish trend continues and it doesn’t appear to be turning away soon,” said Brad Florer, a trader at Kottke Associates LLC in Louisville, Ky. “Overall fundamentally, technically and just about any other way you look at it, the upside will have a hard time to find any follow through unless the fundamentals really change.”
Natural gas for February delivery fell 3.8 cents, or 1.3 percent, to $2.989 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Sept. 11, 2009. The futures fell for the fourth straight year.
“Three dollars is less of a technical support, it’s more psychological,” said Kevin Cabla, an analyst with Raymond James in Houston. “Starting next Tuesday, you could see a little more volatility and volume” as commodity funds layer on new positions at the start of the year, he said.
Mild weather across eastern states this winter has curbed demand for gas. About 51 percent of U.S. households use the fuel for heating, Energy Department data show.
Cold weather in the East next week will “fade quickly” with seasonal and above-normal temperatures spreading across the eastern half of the country from Jan. 9 to Jan. 13, according to a forecast today from MDA EarthSat Weather in Gaithersburg, Maryland.
The low temperature in Boston on Jan. 6 may be 34 degrees Fahrenheit (1 Celsius), 11 degrees above normal, according to AccuWeather Inc. in State College, Pennsylvania. Chicago may see a low of 26 degrees, 7 above normal.
Heating demand may be 20 percent below normal from Jan. 5 through Jan. 9, according to Weather Derivatives in Belton, Mo.
“Unless the weather changes dramatically, we are on track for the highest year-end storage ever,” said Phil Flynn, senior market analyst at PFGBest Research in Chicago. Horizontal drilling and hydraulic fracturing have led to strong gas production, Flynn said.
“We are going to look back at 2011 as a turning point for the U.S. energy industry,” Flynn said. “Instead of worrying if we have enough natural gas to survive, we are talking about becoming an exporter.”
U.S. inventories fell 81 billion cubic feet to 3.548 trillion in the week ended Dec. 23, compared with the five-year average drop for the week of 122 billion, according to an Energy Department report yesterday. Supplies were 13.7 percent above the five-year average for the week, the widest spread since June 2010, department data show.
Stockpiles rose to a record 3.852 trillion cubic feet in November, according to government data compiled by Bloomberg.
The department said in a separate report yesterday that gas output in the lower 48 states rose 1.4 percent to 71.28 billion cubic feet a day in October.
The number of rigs drilling for gas rose by 7 to 809 this week, according to a report yesterday from Baker Hughes Inc. in Houston. The rig count, which peaked for the year at 936 in October, fell 12 percent in 2011.
“You aren’t going to see any material change in gas prices until you drop at least another hundred rigs,” Cabla said.
Winter Storage
The U.S. gas surplus will swell further through the first quarter barring extended cold weather, Pax Saunders, an analyst at Gelber & Associates in Houston, said in a report Friday.
Gas producers could face a “crisis as storage swoons perhaps above 2 Tcf at the end of the season,” he said. The five-year average for gas storage levels in the week ended April 1, 2011, was 1.569 trillion cubic feet, according to data from the Energy Department.
The “oversold conditions” in gas will remain unless there is a significant change in the weather and supply surplus, said Brad Florer, a trader at Kottke Associates LLC in Louisville, Kentucky. Prices may test the $2.85 level next week, he said.
The price discount of February futures to the March contract narrowed 0.1 cent to 2.7 cents. The discount of March to April fell 0.2 cent to 6.3 cents.
The Nymex February contract is at a “fragile price” that hasn’t been this low since 2002, Saunders said.
February $2.60 puts, bets that prices will fall, were the most-active options in electronic trading, falling 0.1 cent to 1.9 cents on volume of 778 as of 3:20 p.m.
Volume in electronic trading was 124,327 contracts as of 2:34 p.m., compared to the three-month average is 307,000. Volume was 200,406 yesterday. Open interest was 1.01 million compared to an average of 975,000. The exchange has a one- business-day delay in releasing full volume and open interest data.
And yet my gas bills don’t seem to be falling…
There’s still a push to sell US shale gas overseas by way of LNG. Yet, shale fracturing was sold as making the US energy independent. Let’s put a hefty export tax on LNG, & US natural gas bills should go down. Plus, start using more US natural gas to replace fuel oil for heating will help energy independence in a real way.