Natural Gas Caps Third Monthly Drop of Year on Stockpile Gains

May 30, 2014 3:46 pm ET

May 30 (Bloomberg) -- Natural gas futures capped the third monthly decline this year on speculation that moderate U.S. weather will cut demand from power plants, allowing more of the fuel to be stored for use next winter.

Gas fell 0.4 percent as Commodity Weather Group LLC said above-normal temperatures across most of the lower 48 states will ease to more seasonal levels June 4 through June 13. Gas prices have dropped 5.7 percent this month as inventory gains accelerated, topping five-year average increases for six straight weeks.

“We came off of a winter that was very strong and we are in a shoulder period where there isn’t that much demand,” said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami. “When people talk about next week’s storage number it should be higher than the one we just had. That will be on the bearish side because it will show consecutive increases in injections.”

Natural gas for July delivery slid 1.7 cents to settle at $4.542 per million British thermal units on the New York Mercantile Exchange. Volume of all futures traded was 23 percent below the 100-day average at 2:52 p.m. The futures rose 3.1 percent this week, the first gain in four weeks, and have advanced 7.4 percent this year.

While mild weather and the pick-up in fuel stockpiling are pressuring prices, Saal said he is bullish longer term because “we haven’t seen any enormous injections yet that take the fear out of the market.”

The high temperature in New York on June 4 maybe 84 degrees Fahrenheit (29 Celsius), 8 above normal, before dropping a week later to 73 degrees, 5 lower than average, according to AccuWeather Inc. in State College, Pennsylvania.

Power Plants

Power plants account for 31 percent of gas consumption, peaking in the hot-weather months on air-conditioner use, according to the U.S. Energy Information Administration, the statistical arm of the Energy Department.

Gas inventories rose by 114 billion cubic feet to 1.38 trillion in the week ended May 23, the biggest weekly gain in a year, an EIA report yesterday showed. The five-year average gain for the period is 93 billion. A supply deficit to the average narrowed to 40.1 percent from a record 54.7 percent at the end of March.

Production heading toward an all-time high for the fourth straight year will boost stockpiles to 3.405 trillion cubic feet by the end of October, which would be the lowest level before the start of the peak heating-demand season since 2008, the EIA said in its May 6 Short-Term Energy Outlook.

Weekly Storage

To get to that level, weekly gains will need to average 90 billion cubic feet from April 25 through October, 20 billion above average increases. Injections to storage during the first five weeks of the period have averaged 96.2 billion cubic feet.

Saal said his preliminary estimate for next week’s stockpile increase is 119 billion cubic feet, based on relatively low demand this week because of the Memorial Day holiday on May 26 and mild weather. The five-year average gain for the week is 93 billion.

The market needs weekly injections to reach 130 billion to 140 billion to prove it can replenish supplies to meet demand next winter, he said.

Storage gains will likely drop next month because “temperatures in three weeks are going to rise; you have the longest day of the year so there’s more sun,” said Kyle Cooper, director of research with IAF Advisors in Houston. “Absent something really crazy, there are going to be more air conditioners running than right now.”

U.S. Production

Gross gas production rose 1.6 percent in the lower 48 states in March from the previous month as new wells were brought online in Texas and the Appalachia and Uinta basins, according to the EIA-914 report today. Output was up 6 percent from a year earlier.

The number of rigs drilling for gas rose by 1 last week to 326, Baker Hughes Inc. data today showed. The number is down 13 percent this year.

U.S. marketed gas output will increase 3 percent this year to average a record 72.26 billion cubic feet a day, the EIA’s outlook showed. Gains are being driven by new wells coming online at shale deposits such as the Marcellus in the Northeast.