Natural Gas Retreats From 3-Week High on Cooler Midwest Outlook

Aug 07, 2014 3:00 pm ET

Aug. 7 (Bloomberg) -- Natural gas futures retreated from a three-week high in New York after weather forecasts turned cooler for the eastern U.S., signaling limited fuel demand.

Government midday weather models “came in a little cooler for the eastern half of the country,” primarily in the Midwest, for the next six to 15 days, said Jim Southard, a meteorologist with Frontier Weather Inc. in Tulsa, Oklahoma. Gas climbed 3.6 percent this week through yesterday on forecasts for more seasonal August heat across the East.

“The weather forecasts have shifted toward a cooler stance after this brief warm up and that’s weighing on prices,” said Martin King, an analyst with FirstEnergy Capital Corp in Calgary “I think we will drift down a little bit more, another nickel or dime.”

Natural gas for September delivery slid 5.7 cents, or 1.5 percent, to settle at $3.876 per million British thermal units on the New York Mercantile Exchange after rising to $3.981, the highest intraday price since July 17. Volume for all futures traded was 58 percent above the 100-day average. Gas has dropped 8.4 percent this year.

The National Climatic Data Center’s Global Forecast System showed below-normal temperatures from the central Plains into the Midwest, Northeast and parts of the South next week through Aug. 21, said Frontier Weather. Earlier forecasts showed the cooler weather limited to the Great Lakes area. The outlook turned hotter for the West Coast.

Cool Chicago

The high in Chicago on Aug. 13 will be 77 degrees Fahrenheit (25 Celsius), 5 below normal, according to AccuWeather Inc. in State College, Pennsylvania. Electricity producers are the biggest consumers of gas in the U.S., accounting for 31 percent of demand.

Gas inventories have rebounded at a record pace since dropping to an 11-year low in March, according to 20 years of government data. Canadian air that spurred record gas demand during a frigid winter also made the previous two months the coolest June and July for the U.S. since 2009, based on population and energy use, according to Commodity Weather Group LLC in Bethesda, Maryland.

Gas stockpiles rose 82 billion in the week ended Aug. 1 to 2.389 trillion, topping the five-year weekly average increase for the 16th straight week, a U.S. Energy Information Administration report today showed. Analyst estimates compiled by Bloomberg showed a gain of 83 billion, while a survey of Bloomberg users predicted 82 billion.

Bigger Increases

“This week is unusual and it represents a single phenomenon,” said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York. “This is smaller than last year’s build, but here on out through late September we think this trend of over-sized injections will continue.”

She reduced her price forecast for 2014 to $4.45 per million Btu and for 2015 to $3.90 from $4.50 for both on production gains.

An inventory deficit to five-year average levels narrowed to 20.3 percent from 21.7 percent the previous week, the EIA said. Inventories were 18.4 percent below year-earlier levels, compared with 18.7 percent in last week’s report.

Deficits have narrowed as supplies increased by more than 100 billion cubic feet in nine weekly reports since the end of March. Storage injections may top 100 billion again as temperatures start to decline in late August, said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami.

“There’s plenty of injection season left,” he said.

Winter Supplies

The EIA estimates that record production will help raise inventories to 3.431 trillion cubic feet before the heating season starts in November, which would be the lowest level for the time of the year since 2008.

To get there, storage injections will need to average 80 billion cubic feet per week, lower than the average rate of 87 billion so far.

The pace of weekly gains indicates inventories may rise to 3.61 trillion cubic feet by the end of October and may reach 3.7 trillion, King said.

“We are still on track, pushing toward those levels,” he said. “I haven’t seen anything to suggest otherwise.”