Natural Gas Erases 2014 Gain on Mild Weather, Rising Storage

Jul 07, 2014 3:32 pm ET

July 7 (Bloomberg) -- Natural gas futures posted the biggest one-day drop in four months in New York, wiping out 2014 gains, on speculation that inconsistent U.S. heat may limit demand for the power-plant fuel.

Above-normal East Coast temperatures this week will give way to seasonal norms from July 12 through July 21, said Commodity Weather Group LLC in Bethesda, Maryland. The Midwest will be normal or cooler over the period. Prices that surged as much as 53 percent in February on frigid weather have deflated as supplies rebounded on a record string of storage injections.

“Without calls for sustained heat across the major gas- consuming regions of the country, we continue to come under pressure,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “Gas coming out of the ground is slowly eating away the fear that we won’t have enough gas for next winter heating season.”

Natural gas for August delivery fell 18.1 cents, or 4.1 percent, to $4.225 per million British thermal units on the New York Mercantile Exchange, the lowest settlement since Jan. 10. It was the biggest one-day percentage decline since Feb. 27. Volume was 3 percent below the 100-day average at 2:38 p.m. Prices are down 0.1 percent this year.

The premium for March futures versus April narrowed 6.4 cents to 29.7 cents, the least since Jan. 20. The spread, a proxy for fuel supplies at the end of the peak heating-demand season versus the start of the stockpiling period, is hovering at the narrowest for this time of the year since 2008.

Climb Tomorrow

New York City’s high temperature will climb tomorrow to 91 degrees Fahrenheit (33 Celsius), 7 above normal, before dropping a week later to 83, according to AccuWeather Inc. in State College, Pennsylvania. Chicago’s reading on July 9 will be 75 degrees, 10 below normal, and will stay near that level for the next week.

Electricity generators account for 31 percent of gas consumption in the country with demand peaking in the third- quarter, U.S. Energy Information Administration data show.

Gas supplies expanded by more than 100 billion cubic feet for eight consecutive weeks, a record in government data going back to 1994. U.S. inventories totaled 1.929 trillion cubic feet in the week ended June 27, 29 percent below the five-year average for the period, according to the EIA. That supply deficit narrowed from a record 54.7 percent in March, when storage levels tumbled to 822 billion, the least since 2003.

Rising Stockpiles

Stockpiles probably rose by 92 billion cubic feet last week, Dominick Chirichella, senior partner at the Energy Management Institute in New York, said in a note to clients today. Tim Evans, an energy analyst at Citi Futures in New York, projected a gain of 88 billion. The five-year average increase for the period is 72 billion.

Wellhead production climbed to 77.19 billion cubic feet in the week ended July 3, up 4.4 per percent since the end of 2013, according to data from LCI Energy Insight, an analysis and consulting company in El Paso, Texas. Output was the highest in LCI data going back to 2006, driven by gains from the eastern U.S., including the Marcellus shale deposit.

Gas futures have slumped 14 percent since touching $4.886 per million Btu on June 16, a seven-week high, as storage gains accelerated.

Bullish and bearish traders have been staging a race to see if the industry can replenish inventories before the summer heat arrives, said Walter Zimmerman, chief technical strategist at United-ICAP, a brokerage in Jersey City, New Jersey. “The bears won that race. The heat still hasn’t showed up because we keep getting these cooling breaks and inventories are building quite rapidly.”

Support Range

The futures tested a critical support area today and “if this market breaks $4.20, I’m pretty confident we are going to hit $3.98,” which is a multi-year technical support line, Zimmerman said.

Money managers cut net-long positions, or wagers on rising prices, on futures, options and swaps by 15 percent to 254,831 futures equivalents in the seven days ended July 1, the least since Dec. 3, according to U.S. Commodity Futures Trading Commission data. It was the biggest percentage drop since the week ended Nov. 15.

The wider measure includes an index of the contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.

“We continue to shake out net longs that piled up and that is where the majority of the selling pressure is coming from,” McGillian said. “We lopped off enough in the last few weeks. The fact that we have a good six to eight weeks of the summer cooling season in front of us should provide support to the market.”