Natural Gas Falls From 18-Month High on Warmer April Outlook

March 20 (Bloomberg) -- Natural gas futures dropped in New York for the first time in six days as the outlook for milder weather next month signaled reduced demand for the fuel.

Gas fell 0.2 percent as MDA Weather Services predicted temperatures will be normal across most of the lower 48 states from March 30 through April 3. Previous forecasts showed colder weather, which propelled prices to an 18-month high yesterday. The relative strength index, or RSI, has traded above 70 since March 13, which can be a sell signal.

“There is definitely a change to the warm side in the forecast,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “It doesn’t surprise me the market ran into trouble at these lofty levels. We’ve had an RSI over 70; that indicates an extremely overbought situation.”

Gas for April delivery slipped 0.9 cent to close at $3.96 per million British thermal units on the New York Mercantile Exchange. Trading volume was 20 percent above the 100-day average at 2:35 p.m. Prices yesterday jumped to $3.969, the highest settlement price since Sept. 14, 2011. The futures are up 18 percent this year. Open interest rose to 1.34 million contracts yesterday, a third straight record.

The discount of April contracts to October, a gauge of summer demand for gas, eased 0.7 cent from yesterday to 11.3 cents. The spread over the past month has been the narrowest for this time year going back to 2003.

Gas bounced back from a 2.1 percent drop after a midday government weather update turned colder from western Illinois into the Dakotas in the 11-to 15-day period, said Jim Southard, a meteorologist for Frontier Weather Inc.

Options Volatility

“So instead of the cold anomalies being centered on the South and Southeast, now they look to be more focused on the Midwest,” he said.

May $3.80 puts were the most active gas options in electronic trading. They rose 0.7 cent to 9.1 cents per million Btu on volume of 630 contracts as of 3.09 p.m. Puts accounted for 49 percent of the volume.

Implied volatility for at-the-money options expiring in May was 33.47 percent at 3 p.m., up from 32.63 percent yesterday.

The high in Washington April 2 may be 51 degrees Fahrenheit (11 Celsius), 8 above normal, according to AccuWeather Inc. in State College, Pennsylvania. Atlanta may also have a high of 51, 4 above the usual reading.

About 50 percent of U.S. households use gas for heating, according to the Energy Information Administration, the Energy Department’s statistical arm. Consumption typically slumps between the heating season and before hot weather drives power demand to run air conditioners.

Analyst Estimates

Gas stockpiles probably fell 71 billion cubic feet last week, based on the median of 17 analyst estimates compiled by Bloomberg. The five-year average decline for the period is 26 billion, according to the EIA, which is scheduled to release its weekly gas supply report tomorrow.

“If we get an EIA number in the mid-70s, 75 or 74 bcf, we could still push the front-month above $4 and even reach $4.10,” Laurent Key, a natural gas analyst for Societe Generale SA in New York, said in an interview yesterday.

Key raised his 2013 gas price forecast to $3.69 per million Btu because of “bullish withdrawals experienced at the end of winter,” he said in a note to clients today. Stockpiles will end the heating season at 1.735 trillion cubic feet, 65 billion lower than his November outlook.

Supply Decline

Inventories totaled 1.938 trillion cubic feet in the week ended March 8, falling below 2 trillion for the first time since May 2011, EIA data show. A surplus to the five-year average fell to 11.4 percent from 14.8 percent the previous week. A deficit to year-earlier levels widened to 18.5 percent, the most since April 2008.

U.S. marketed production will climb to a record for the sixth consecutive year as gains from shale deposits such as the Marcellus in the Northeast make up for a decline in dry-gas drilling rigs, a March 12 EIA report showed. Output will increase 0.7 percent to 69.6 billion cubic feet a day from 2012.

The boom in oil and natural gas production helped the U.S. cut its reliance on imported fuel. America met 84 percent of its energy needs in the first 11 months of last year, government data show. If the trend continued through 2012, it will be the highest level of self-sufficiency since 1991.

--With assistance from Christine Buurma in New York. Editors: Bill Banker, Dan Stets