Natural Gas Trims Weekly Gain as Milder Weather Cuts Demand

Jan 17, 2014 3:57 pm ET

Jan. 17 (Bloomberg) -- Natural gas dropped in New York, trimming its first weekly gain in a month, on speculation that unusually mild U.S. weather is easing demand.

Gas fell 1.3 percent as forecasters including Commodity Weather Group LLC said above-average temperatures across most of the U.S. this week will linger in the Northeast for the next five days. Prices jumped 6.4 percent this week as weather models showed a return to frigid weather in late January and the government reported a record stockpile decline.

“The current weather is warmer than it was last week, but the projections are that we are going to get some colder weather around the corner,” said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami. “The market is trying to determine the impact of the next cold front.”

Natural gas for February delivery slid 5.6 cents to settle at $4.326 per million British thermal units on the New York Mercantile Exchange. Volume was 7 percent below the 100-day average at 2:56 p.m. Prices yesterday rose to $4.495, the highest intraday price since Dec. 23. The futures, which capped their first weekly gain since Dec. 20, are up 24 percent over the past year.

Volatility in the gas market has increased with swings in temperatures this winter. Implied volatility for at-the-money February options was 38.29 percent as of 2:45 p.m., up from 31.1 percent for December contracts at the start of the heating season on Nov. 1, and 32.5 percent for February 2013 options a year ago.

Monthly Spreads

The premium of February to March futures widened 0.9 cent to 6.7 cents, the most since March 29. March gas traded 17.8 cents above the April contract, compared with 21.2 cents yesterday.

March $6 calls were the most active options in electronic trading. They were 2 cents lower at 3.3 cents per million Btu on volume of 1,272 at 3:31 p.m. Calls accounted for 60 percent of trading volume.

Weather models showed that the Midwest to the East Coast will see a stronger blast of cold weather from Jan. 22 through Jan. 31 than previous forecasts showed, said Matt Rogers, president of Commodity Weather in Bethesda, Maryland.

“For the most part, next week’s cold should miss Texas, but we will need to watch the risk closely for possible stronger sneak attacks,” he said.

The high temperature in Chicago on Jan. 22 will drop to 8 degrees Fahrenheit (minus 13 Celsius), 23 below normal, after readings in the high 40s earlier this week, according to AccuWeather Inc. in State College, Pennsylvania. New York City’s high will drop to 18, 20 lower than average, from the high 50s during the same period.

Stockpile Report

About 49 percent of U.S. households use gas for heating, with the biggest users in the Midwest, followed by the Northeast, U.S. Energy Information Administration data show.

Gas inventories fell 287 billion cubic feet in the seven days ended Jan. 10 to 2.53 trillion, a record decline data going back to 1994, an EIA report yesterday showed. A supply deficit to the five-year average widened to a record 14.9 percent from 10.1 percent a week earlier.

Mild weather this week means the next EIA report will probably show the withdrawal rate fall to 96 billion cubic feet, Tim Evans, an energy analyst at Citi Futures in New York, said in a note to clients today. The five-year average decline for seven days ending today is 181 billion.

Moderating Weather

“This week’s weather has moderated compared to the bitter cold” last week, said Dominick Chirichella, senior partner at the Energy Management Institute in New York. “Much like the market priced in a record inventory withdrawal prior to its release this week, market participants seem to be pricing in a lower-than-normal withdrawal ahead of next week’s report.”

The number of rigs drilling for gas rose by eight this week to 365, Baker Hughes Inc. said today. The rig count is down 15 percent from a year ago.

Gas production in the U.S. will climb in 2014 for the seventh consecutive year as new wells come online at shale deposits such as the Marcellus in the Northeast, the EIA said in its Jan. 7 Short-Term Energy Outlook. Output will increase 2.1 percent to 71.66 billion cubic feet day.

The U.S. met 86 percent of its energy needs in the first eight months of 2013, on pace to be the highest annual rate since 1986, government data show.

--Editors: Bill Banker, Richard Stubbe