Bloomberg News

Natural Gas Drops for Second Day on Moderating Weather Outlook

September 12, 2011

Sept. 12 (Bloomberg) -- Natural gas futures declined for a second day in New York on forecasts of cooler-than-normal weather that may limit demand for the fuel from power plants.

Gas dropped 0.8 percent after companies including Commodity Weather Group LLC in Bethesda, Maryland, predicted normal or below-normal temperatures in the eastern U.S. and parts of the Midwest through Sept. 21. The remnants of Tropical Storm Nate were over Mexico, bypassing gas platforms and pipelines in the U.S. Gulf of Mexico.

“We have limited seasonal demand coming up, and there’s not really a threat of tropical disruptions in the Gulf,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The gas market has weak underlying fundamentals.”

Natural gas for October delivery fell 3 cents to settle at $3.885 per million British thermal units on the New York Mercantile Exchange. Gas has declined 12 percent this year.

October 2011 $3.75 puts, bets that prices will fall, were the most active options in electronic trading. The puts fell 0.3 cent to 4.9 cents per million Btu on volume of 376 lots.

The price difference, or spread, between futures for delivery in October 2011 and January 2012 widened 1.4 cents to 40.7 cents. Gas futures often reach a seasonal low in October, when mild weather reduces demand, before recovering in the winter, when heating-fuel use peaks.

Mild Weather

The high temperature in New York on Sept. 17 may be 69 degrees Fahrenheit (21 Celsius), 6 below normal, according to AccuWeather Inc. in State College, Pennsylvania. The high in Chicago may also be 69 degrees.

Cooling demand in the U.S. may be 26 percent below normal from Sept. 18 through Sept. 22, according to Weather Derivatives in Belton, Missouri.

Power plants use about 30 percent of the nation’s gas supplies, according to the Energy Department.

Nate weakened as it moved over Mexico with heavy rains and has been downgraded to a post-tropical system, the U.S. National Hurricane Center said. The remnants of the storm were about 75 miles (120 kilometers) west-southwest of Tuxpan, Mexico, with maximum winds of 30 mph, the center said in its final advisory for the storm.

The Atlantic hurricane season runs from June 1 to Nov. 30. The season has yielded 15 tropical systems, including Tropical Storm Lee, which shut as much as 55 percent of Gulf of Mexico natural gas output when it passed through the region.

Production Levels

The Gulf is home to 6.5 percent of U.S. natural gas production, according to the Energy Department.

“We continue to see fundamental weakness in the near term as Tropical Storm Nate missed the U.S. Gulf of Mexico and the summer cooling season is winding down,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York, in a note to clients today.

Gas futures may rally to $4.50 or higher in the months ahead as traders focus on winter heating demand, Evans said.

Marketed gas production will average a record 65.79 billion cubic feet a day in 2011, up from 65.51 billion estimated in August, the Energy Department said in its monthly Short-Term Energy Outlook, released Sept. 7 in Washington. Output averaged 61.83 billion cubic feet a day in 2010.

Gas prices at the benchmark Henry Hub in Erath, Louisiana, will average $4.20 per million Btu this year, down from last month’s estimate of $4.24, according to the report.

Natural gas futures volume in electronic trading on the Nymex was 218,763 as of 2:35 p.m., compared with the three-month average of 281,000. Volume was 272,032 on Sept. 9. Open interest was 969,993 contracts. The three-month average open interest is 983,000. The exchange has a one-business-day delay in reporting open interest and full volume data.

--With assistance from Ann Koh in Singapore and Lananh Nguyen in London. Editors: Bill Banker, Charlotte Porter

To contact the reporter on this story: Christine Buurma in New York at cbuurma1@bloomberg.net;

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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