Bloomberg News

Natural Gas Declines After Larger-than-Forecast Supply Gain

October 27, 2011

Oct. 27 (Bloomberg) -- Natural gas futures declined in New York after a government report showing a bigger-than-forecast increase in U.S. stockpiles raised concern that supplies may reach record levels.

Gas fell 1.8 percent after the Energy Department said supplies rose 92 billion cubic feet last week to 3.716 trillion cubic feet, 124 billion short of the record set last November. Analysts expected an increase of 89 billion, based on median of 25 estimates compiled by Bloomberg. The five-year average gain for the week is 47 billion.

“It was much higher than expected and pretty high for the time of year,” said Peter Beutel, president of Cameron Hanover Inc., an energy advisory company in New Canaan, Connecticut. “It’s almost double what the average gain is, and it was just more than the market could take right now.”

Natural gas for November delivery declined 6.6 cents to settle at $3.524 per million British thermal units on the New York Mercantile Exchange. Gas has dropped 20 percent this year. The contract, which expired today, traded as low as $3.495 and as high as $3.60.

The more actively traded December futures fell 1.1 cents, or 0.3 percent, to settle at $3.764. The difference, or spread, between the two contracts widened by 5.5 cents to 24 cents.

Demand will increase in December as temperatures fall, said Tim Evans, an energy analyst at Citi Futures Perspective in New York. Last year, when stockpiles reached a record, demand increased by 74 percent from October to January, pushing prices as high as $4.606 in December, he said.

“I’m expecting to see a seasonal turn in this market, and a run up to $4.50,” Evans said. “Week by week and month by month we’ll be seeing stronger demand.”

Mild Weather

Higher-than-normal temperatures forecast in the first two weeks of November may damp demand for the fuel and boost stockpiles. The U.S. Midwest and Southeast will see above-normal temperatures through Nov. 10, said Matt Rogers, president of Commodity Weather Group, in a note to clients today.

U.S. heating demand will be 24 percent below normal from Nov. 2 to Nov. 6, according Weather Derivatives in Belton, Missouri. Heating demand in Chicago will be 27 percent below normal from Nov. 2 to Nov. 6 and consumption will be 29 percent below normal in Cleveland.

“If we don’t see any big demand events over the next couple of weeks, then we’re going to see a new record,” said Phil Flynn, vice president of research at PFGBest in Chicago.

Production Report

Gas production from the lower 48 states rose 0.1 percent in July to a record 69.48 billion cubic feet as output from shale formations in Louisiana and the Northeast rose, according to Energy Department data going back to 2005. The department’s Energy Information Administration is set to release its next monthly production report, known as EIA-914, tomorrow.

If temperatures don’t drop below last year’s lows, natural gas may find it difficult to sustain a rally on colder weather, said Teri Viswanath, a Houston-based analyst at BNP Paribas SA.

“With so much gas in the market, that leads to the possibility that we’ll have seasonal record storage levels exiting the winter,” Viswanath said.

December $3.25 puts options, or bets that prices will fall, were the most active options in electronic trading. The puts were down 0.3 cent to 1 cent at 2:58 p.m. on volume of 1,061.

Natural gas futures volume in electronic trading on the Nymex was 307,191 as of 2:33 p.m., compared with a three-month average of 312,000. Volume was 269,952 yesterday. Open interest was 974,788, compared with the three-month average of 972,000. The exchange has a one-business-day delay in reporting open interest and full volume data.

--Editors: Bill Banker, Margot Habiby

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net.

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


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