Natural Gas Drops Below $3 for First Time Since 2012 By Naureen S. Malik – Dec 26, 2014, 2:56:43 PM

Natural Gas Drops Below $3 for First Time Since 2012
By Naureen S. Malik – Dec 26, 2014, 2:56:43 PM Bloomberg

Natural gas slumped below $3 per million British thermal units in New York for the first time since 2012 on speculation that record production will overwhelm demand for the heating fuel.

Futures settled at the lowest in 27 months and have plunged 26 percent in December, heading for the biggest one-month drop since July 2008, as mild weather and record production erased a surplus to year-ago levels for the first time in two years. Temperatures will be mostly above average in the eastern half of the U.S. through Dec. 30, according to Commodity Weather Group LLC.

“We don’t see anything scary in the forecast,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania. “You had this psyche where people were worried about a polar vortex; we had a cold October and a cold early November, and boom, if you were long you are wrong.”

Natural gas for January delivery fell 2.3 cents, or 0.8 percent, to settle at $3.007 per million Btu on the New York Mercantile Exchange. Futures touched $2.973, the lowest intraday price since Sept. 26, 2012. Volume was 54 percent below the 100-day average for the time of day at 2:32 p.m. Gas dropped 13 percent this week.

Prices broke below several technical support levels, including $3.046 and then $3, and may be headed toward $2.80 or lower, said Schork.

Playing Short

“I am playing this market short,” he said. “Anyone who is selling now is trying to trigger a panic selloff.”

February $2.50 puts were the most active options in electronic trading. The price slipped 0.1 cent to 2.6 cents on volume of 557 as of 2:36 p.m.

Above-normal temperatures in the East this week will give way to mostly seasonal readings from Maine to Florida through Jan. 9, according to Commodity Weather in Bethesda, Maryland. The central states will see below-normal readings on Dec. 31 through the first week of January.

The high in New York tomorrow may be 50 degrees Fahrenheit (10 Celsius), 10 more than usual, data from AccuWeather Inc. in State College, Pennsylvania, show. Chicago temperatures may reach 46 degrees, 13 above normal.

Fracking

An estimated 49 percent of U.S. households use gas for heating, led by the Midwest and Northeast, according to the Energy Information Administration.

“We haven’t seen a lot of cold weather this winter,” said Carl Larry, a Houston-based director of oil and gas at Frost & Sullivan. “The warmer it stays, the more pressure on natural gas. Gas production is not dropping and demand is not that high.”

Rising Output

In the absence of extreme weather, rising production will leave inventories at an all-time high above 4 trillion cubic feet by the end of October 2015, BNP Paribas SA said in a report Dec. 23.

BNP Paribas lowered its estimate for average 2015 gas prices to $3.60 per million Btu from $3.75.

“Unseasonably warm weather this month now necessitates extreme conditions ahead in order to avert a surplus,” Teri Viswanath, director of commodities strategy for the bank in New York, said in the report.

Gas stockpiles fell by 49 billion cubic feet to 3.246 trillion cubic feet in the seven days ended Dec. 19, below the five-year average withdrawal for the fourth straight week, EIA data show.

Supplies were 150 billion, or 4.9 percent, higher than year-earlier levels. The surplus will “balloon to just shy of 200 billion cubic feet” by the start of next year, according to JPMorgan Chase & Co.

Record-High Production

Production of the heating and power plant fuel expanded in 2014 to an all-time high for the fourth consecutive year, rising 5.5 percent to 74.26 billion cubic feet a day, EIA data show. Daily output will rise another 3.1 percent next year to 76.58 billion, marking a decade of gains as technologies such as hydraulic fracturing, or fracking, made it more economic to extract fuel from shale rock.

The Marcellus formation in the East has emerged as the biggest driver of gas production growth in the U.S. Production from the shale formation may average 16.3 billion cubic feet a day in January, up 19 percent from a year earlier, the EIA said in its monthly Drilling Productivity Report on Dec. 8.

“This market continues to look oversupplied,” Aaron Calder, senior market analyst at Gelber & Associates in Houston, said by phone on Dec. 24.

Bears’ Takeover

Low gas prices are “eventually going to provide some sort of floor” by prompting power generators to switch from burning coal, said Calder. “This withdrawal shows that it’s going to be a while coming. In the meantime, we are going to see bears take over this market.”

The relative strength index, a technical momentum indicator, declined to 28.8 at 2:36 p.m., falling below 30, a reading considered by some traders to be a buy signal, for the first time since July. The RSI had risen to more than 74 in October before the recent selloff.

“A lot of people came in trading natural gas not really understanding what a powder keg it is in the energy sector,” Schork said. “This is the most volatile market but had been lying dormant for four or five years. The fact that its breaking the $3 barrier, at this point buy at your own risk.”

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 Charlotte Porter,

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