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Natural Gas Drops to 20-Week Low as Milder Weather Cuts Fuel Use

By: Naureen S. Malik |

Natural gas futures tumbled to the lowest level since March in New York on milder weather that will cut demand from power plants.

Gas dropped 6.2 percent this week, capping the biggest decline since the seven days ended Dec. 14, after predictions that most of the eastern U.S. will see seasonal temperatures, with lower readings in the Midwest, from July 31 through Aug. 9, said MDA Weather Services in Gaithersburg, Maryland. The government reported below-average supply gains the previous two weeks as unusually hot weather spurred electricity use.

“The weather forecast showed a persistence of cooler temperatures for the eastern half of the U.S.,” said Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York. “The weather pattern should lead to an accelerated rate of inventory restocking.”

Natural gas for August delivery fell 8.9 cents, or 2.4 percent, to $3.555 per million British thermal units on the New York Mercantile Exchange, the lowest settlement since March 6. Volume was 20 percent below the 100-day average at 3:03 p.m. The futures are up 6.1 percent this year.

The discount for August futures versus October, a proxy for gauging supply levels before the peak heating-demand season, widened 0.7 cent to 2.7 cents.

August $3.60 calls were the most active options in electronic trading. They were down 5.6 cents to 0.1 cent per million Btu on volume of 1,108 at 3:06 p.m. Calls accounted for 49 percent of trading volume. Implied volatility for at-the-money options expiring in September was 30.54 percent at 3 p.m., compared with 29.68 percent yesterday.

Below Normal

The high temperature in New York City on Aug. 9 may be 76 degrees Fahrenheit (24 Celsius), 8 below normal, and Atlanta’s reading may be 7 lower than the average at 81 degrees, according to AccuWeather Inc. in State College, Pennsylvania.

Tropical Storm Dorian, 1,295 miles (2,085 kilometers) east of the northern Leeward Islands, is moving west-northwest and may be over the southern Bahamas early July 31, the National Hurricane Center said in an advisory at 11 a.m. Eastern time. The storm has maximum winds of 50 miles per hour and is expected to weaken a bit in the next day or so, the center said.

“Although it is too early to tell where it will land eventually, the storm would push prices higher only if it causes significant disruptions to gas production in the Gulf of Mexico,” Shiyang Wang, an analyst with Barclays Plc in New York, said in a note to clients today. “If it heads toward Florida, potential power outages and cooler weather due to heavy rainfall could dampen demand.”

Gulf Production

The Gulf will account for 5.8 percent of U.S. gas production in 2013, according to the Energy Information Administration, the Energy Department’s statistical arm. Electricity generators are the largest consumers of gas in the nation, accounting for 32 percent of demand, EIA data show.

Gas stockpiles rose by 41 billion cubic feet last week to 2.786 trillion, below the five-year average gain of 53 billion for the period, an EIA report yesterday showed.

A deficit to the historic average widened to 1.6 percent from 1.2 percent the previous week. Inventories were 12.5 percent below year-earlier levels, compared with 13.1 percent in last week’s report.

The number of rigs drilling for gas held steady this week at 369 after climbing the four previous weeks, Baker Hughes Inc. (BHI) data today showed. The rig count is down 14 percent this year.

U.S. gas production will increase to a record this year as new wells come online at shale deposits such as the Marcellus in the Northeast, according to the EIA. Marketed gas output will increase 1.1 percent from 2012 to 69.96 billion cubic feet a day, the agency said in its July 9 Short-Term Energy Outlook.

The U.S. met 89 percent of its own energy needs in March, the highest monthly rate since April 1986, government data show.