Oct. 16 (Bloomberg) -- Natural gas futures dropped in New York on speculation that mild U.S. weather has bolstered supply gains and as prices near a four-month high prompted some traders to sell contracts.
Gas fell 0.6 percent as inventories may have expanded by 80 billion cubic feet last week, based on the median of 13 analyst estimates compiled by Bloomberg. The five-year average gain for the period is 75 billion, according to the Energy Information Administration, which has suspended its weekly supply reports because of the government shutdown. Prices jumped 2.1 percent in earlier trading on forecasts for colder U.S. weather.
“This rally essentially started about two months ago and we haven’t had that correction that we were looking for, so it’s a technical move,” said John Woods, president of JJ Woods Associates and a Nymex floor trader. “We still have a nice little supply left and it can carry us for the next couple of weeks.”
Natural gas for November delivery fell 2.1 cents to settle at $3.769 per million British thermal units on the New York Mercantile Exchange after rising to $3.869, the highest intraday price since June 21. Trading volume was 29 percent above the 100-day average at 3:03 p.m. Prices have advanced 12 percent this year.
The discount of November to December futures narrowed 0.9 cent to 13.6 cents. November gas traded 22.5 cents below the January contract, compared with 23.7 cents yesterday.
November $3.80 puts were the most active options in electronic trading. They were 1.2 cents higher at 10.8 cents per million Btu on volume of 770 at 4 p.m. Puts accounted for 53 percent of trading volume. Implied volatility for November at- the-money options was 31.43 percent at 3:45 p.m., compared with 31.75 percent yesterday.
Bank of America Corp. cut its fourth-quarter gas forecast to $3.80 from $4.30 as “production is set to bounce back strongly in coming weeks,” while residential and commercial demand will decline after exceptionally cold weather during the last heating season, Sabine Schels, an analyst for Bank of American Corp. in London, said in a note to clients today.
“The current rally will top out quickly as we see little potential for near-dated prices to trade much above $4,” assuming the latest cold front doesn’t linger, Schels said. Gas output may grow 1.9 billion cubic feet a day during this year’s heating season versus a year earlier, according to the report.
Forecasts turned colder in weather models through the end of the month, with the strongest surge in the Midwest to the Ohio valley next week, said MDA in Gaithersburg, Maryland.
The low temperature in Chicago on Oct. 23 will drop to 29 degrees Fahrenheit (minus 2 Celsius), 15 below normal, and will linger at those lows for a week, according to AccuWeather Inc. in State College, Pennsylvania. New York City’s low on Oct. 23 may be 37 degrees, 11 lower than average, and Dallas will drop 13 below normal at 43 degrees.
The cold push at the end of October is probably worth 40 billion to 50 billion cubic feet of extra gas demand, said Brison Bickerton, head of strategy at Freepoint Commodities LLC in Stamford, Connecticut. Expectations for stockpile builds in the first couple of weeks of November “are not likely to materialize if this cold weather pattern holds,” he said.
About 49 percent of U.S. households use gas for heating while 39 percent use electricity, according to the EIA, the statistical arm of the Energy Department.
Stockpiles totaled 3.577 trillion cubic feet in the week ended Oct. 4, 1.6 percent above the five-year average for the seven days, the EIA said last week. Estimates for last week’s supply gain ranged from 72 billion to 90 billion cubic feet.
Production will average 70 billion cubic feet a day in 2013, up 1.2 percent from a record 69.18 billion last year, the EIA said in its Oct. 8 monthly Short-Term Energy Outlook.
The U.S. produced 87 percent of its own energy in the first six months of this year, on pace to be the highest annual rate since 1986, EIA data show.
--Editors: Bill Banker, Charlotte Porter