Natural Gas Retreats From Four-Year High as Cold Outlook Eases

Jan 30, 2014 3:32 pm ET

Jan. 30 (Bloomberg) -- Natural gas retreated from a four- year high on forecasts for milder U.S. weather and a technical indicator showing that prices were poised to fall after yesterday’s 10 percent rally.

Gas dropped 8.3 percent, the most in more than four years, as Commodity Weather Group LLC said changes in the flow of air from Alaska will ease the severity of cold in the lower 48 states from Feb. 9 through Feb. 13. Yesterday’s price increase, the biggest one-day gain since June 2012, resulted in a sell signal on the relative strength index. A government report today showed a U.S. stockpile decline that matched forecasts.

“There are shops that have interpreted the slight warmer revisions to the forecasts as proof that the end of winter is in sight,” said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York. “The market is retracing the fact that it became slightly more overbought.”

Natural gas for March delivery slid 45.4 cents to settle at $5.011 per million British thermal units on the New York Mercantile Exchange. Trading volume was 52 percent above the 100-day average at 2:50 p.m. Today’s decline was the biggest on a percentage basis since Sept. 11, 2009. Gas futures have climbed 18 percent this month.

The February contract surged 52.4 cents as it expired yesterday, reaching $5.557, the highest settlement for a front- month contract since Jan. 25, 2010. The move pushed the RSI to 74.7. A reading above 70 is seen by some traders as a sell signal. The index dropped to 59.4 at 2:51 p.m. today.

The premium for March gas to April narrowed to 65.3 cents from 90.4 cents yesterday. April traded 7.4 cents above May versus 10.9 cents yesterday.

Gas Volatility

March $7 calls were the most active options in electronic trading. They were 12.3 cents lower at 12.7 cents per million Btu on volume of 3,155 at 3:12 p.m. Calls accounted for 76 percent of trading volume.

Implied volatility for March at-the-money options was 83.58 percent at 3 p.m., compared with 91.1 percent yesterday and 33.99 a month ago. Intraday price swings for gas futures, the most volatile component in the Standard & Poor’s GSCI index of 24 commodities, have averaged 26.29 cents so far this year versus 10.86 cents in 2013.

Weather models overnight showed changes in Alaska that would warm the contiguous states back toward more seasonal levels, said Matt Rogers, president of Commodity Weather in Bethesda, Maryland.

About 49 percent of U.S. households use gas for heating, according to the U.S. Energy Information Administration, the Energy Department’s statistical arm.

Stockpile Report

Gas inventories fell by 230 billion cubic feet in the week ended Jan. 24 to 2.193 trillion, the EIA said today. A survey of Bloomberg users predicted a decline of 230 billion while the median of 23 analyst estimates showed a drop of 231 billion. The five-year average decline for the week is 162 billion.

Inventories tumbled by a record 1.386 trillion cubic feet from Oct. 31 through Jan. 17, 50 percent more than the five-year average decline of 927 billion for the period, according to EIA data.

Supplies may end the heating season in March at 1.164 trillion cubic feet, the lowest level since 2008, according to Anthony Yuen, a strategist at Citigroup Inc. New York.

Yuen said “mushrooming demand” will increase U.S. gas use by 23 billion cubic feet a day, or 33 percent, from 2013 through 2020, according to a note to clients today. Demand gains will be driven by exports of liquefied natural gas, shipments to Mexico, and increases in demand for industrial, transportation and heating uses.

Gas production will expand 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. Marketed gas output will increase 2.1 percent to 71.66 billion cubic feet day.

--Editors: Bill Banker, Charlotte Porter