Bloomberg News

Natural Gas Drops as Cool Weather to Limit Fuel Demand

July 30, 2014

Natural gas fell for the third time in four days in New York as cool weather during the peak air-conditioning season cut demand, allowing more of the fuel to flow into storage.

Temperatures will be below normal from the East Coast to the Rocky Mountains over the next five days, with lower readings lingering in the central U.S. through Aug. 13, said MDA Weather Services. Gas has slumped 23 percent from a 15-week intraday high on June 16 as supplies increased during the first half of the stockpiling season at the fastest pace since 2001.

“The primary factors are still bearish, and it looks like this steady six-week slide is starting to pick up again,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “With the weather forecasts pointing to very much mild weather across the eastern two-thirds of the U.S. in the next two weeks, and record gas coming out of the ground, the market doesn’t have a lot going on right now.”

Natural gas for September delivery slid 3.8 cents, or 1 percent, to settle at $3.786 per million British thermal units on the New York Mercantile Exchange. Volume for all futures traded 29 percent below near the 100-day average at 2:48 p.m. Prices are down 11 percent this year.

East Coast temperatures will return to more seasonal norms from Aug. 4 through Aug. 13 while above-normal readings on the West Coast ease, said MDA in Gaithersburg, Maryland.

Weather Outlook

The high in Atlanta on Aug. 1 may be 79 degrees Fahrenheit (26 Celsius), 9 below normal, while Dallas will be 13 lower than average at 84 degrees, according to AccuWeather Inc. in State College, Pennsylvania. Power plants account for 31 percent of U.S. gas consumption.

Increased output from nuclear reactors is damping demand for gas to produce electricity. Nuclear generation rose 0.2 percent today to 94,389 megawatts after two nuclear reactors were restarted in Connecticut and Georgia, the most since July 26, U.S. Nuclear Regulatory Commission data compiled by Bloomberg show. Output this month has averaged 95,192 megawatts, the most for the month of July since 2011.

“The current bearish pricing environment is driven by the need for the market to encourage price-induced coal-to-gas switching to compensate for lower overall power generation demand in this period of mild weather,” Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc. in New York, said in a July 28 note to clients.

Goldman View

Significant fuel switching away from coal won’t be needed under normal weather conditions “until significant supply growth comes online in November, driven by pipeline debottlenecking out of the Marcellus and Utica shale plays,” he said. Goldman Sachs maintained its 2014 price forecast of $4.50 per million Btu.

Marcellus output will climb to 15.48 billion cubic feet a day in August, up 27 percent from a year earlier, U.S. Energy Information Administration data show. The government does not release monthly data on the Utica shale. Both shale deposits are in the Northeast.

The number of producing wells in the Utica shale has increased 75 percent in the past six months to 472 from 270, Thomas Farrell, chief executive officer of Dominion Resources Inc. (D:US), said in a conference call with analysts today. A total of 1,386 horizontal well permits have been issued for the deposit, of which 942 have been drilled, he said.

Blue Racer Midstream brought online a second Natrium facility, with processing capacity of 200 million cubic feet a day of Utica gas, in the second quarter and, “based on new wells coming online, should be at full capacity soon,” Farrell said. Dominion is a joint venture partner in Blue Racer.

Stockpile Outlook

Gas stockpiles in the lower 48 states probably expanded by 93 billion cubic feet last week, based on the median of 17 analyst estimates compiled by Bloomberg. Estimates ranged from gains of 85 billion to 100 billion. The five-year average increase for the period is 46 billion.

Storage levels have risen by 1.397 trillion cubic feet from an 11-year low in March to reach to 2.219 trillion cubic feet in the week ended July 18, according to the EIA. That is the fastest pace of injections since 2001.

The drop in gas prices may boost consumption from the power sector by 1.1 billion cubic feet a day, removing 100 billion cubic feet of storage injections, Francisco Blanch, head of commodities research at Bank of America Corp. in New York, said in a note to clients today.

“We see limited further downside risk to U.S. natural gas prices and believe a floor to prompt prices should form at around $3.50/mmBtu on increased power burn,” he said.

To contact the reporter on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Bill Banker, Charlotte Porter


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