Natural gas surplus and weather drive prices down to 2-year low
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A natural gas surplus and warmer-than-normal weather have pushed the price of the heating fuel to the lowest level in more than two years.
Natural gas plunged 13 percent last week on the New York Mercantile Exchange, the biggest decline since August 2009, after forecasts showed above-average temperatures through January. Stockpiles in the week ended Jan. 6 stood at 3.377 trillion cubic feet, 17 percent above the five-year average, the U.S. Energy Department reported on Wednesday.
Hedge funds and other large speculators switched from bets that futures will rise to a bearish, or "short," position in the week ended Jan. 10, according to the Commodity Futures Trading Commission's Commitments of Traders report on Friday.
"The funds that got short are feeling good right now," Kyle Cooper, director of research for IAF Advisors in Houston, said. "As long as it stays this warm, prices have to go lower. With this type of weather, the storage surplus becomes catastrophic."
Supplies may reach a seasonal record of 2.4 trillion cubic feet in March, which is when heating demand usually ends and producers begin piping more gas into storage, Mr. Cooper said. Unless production falls or cold weather bolsters demand, prices will drop to $2.40 per million Btu, and perhaps below $2, as gas overflows storage caverns and clogs pipelines, he said.
"This is a situation that has never been seen before," Mr. Cooper said. "If we hit 2.4 trillion, you're looking at storage capacity constraints by July or August where you literally have system problems because the system is so full."
U.S. gas production will rise to an all-time high next year amid rising output from shale formations, according to Energy Department estimates.
Matt Rogers, president of Commodity Weather Group LLC in Bethesda, Md., said his predictions for January heating degree days, a measure of demand for fuel during cold weather, fell by 115, or 12 percent, to 822 from his Dec. 30 estimate of 937.
"It's nowhere close to what we were expecting," Mr. Rogers said. "It's making everyone question whether there will be any cold weather this winter."
Heating demand will be 4.4 percent below normal in the U.S. through Friday, and 6 percent below normal in New York, said David Salmon, a meteorologist with Weather Derivatives in Belton, Mo., in a report to clients Friday.
About 51 percent of U.S. households use gas for heating, according to the Energy Department.
First Published January 17, 2012 12:00 am
