US natural gas trades below $2/MMBtu for first time in three years

By NAUREEN S. MALIK
Bloomberg

US natural gas traded below $2/MMBtu on Tuesday for the first time since April 2012, as a glut of the power-plant and heating fuel expands toward a record.

Unusually warm weather for this time of year is threatening to crimp gas demand just as caverns and reservoirs are filling up with supplies. The front-month contract fell as much as 5.5% Tuesday, extending Monday’s 9.8% drop, after money managers last week raised bearish gas bets to an all-time high.

“The severe plunge over the last couple of days I find to be a little unexpected; it does show there are a lot of worries about supply going into a mild winter,” said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut. “Right now we have priced in a lot of fear, and now the question comes down to whether the forecasts prove to be accurate.”

Producers are using hydraulic fracturing and horizontal drilling to pull so much gas out of US shale formations that stockpiles of the fuel are on track to reach a record 3.956 trillion cubic feet this month, based on a US Energy Information Administration forecast. A supply glut to year- earlier levels is hovering at the highest level for the time of the year in data going back to 2005. The glut prompted Goldman Sachs Group and Bank of America to cut short-term gas price forecasts last week.

Gas for November, which expires Wednesday, rose 3.8 cents to $2.10/MMBtu at 10:46 a.m. on the New York Mercantile Exchange after sliding to $1.948, the lowest intraday price since April 20, 2012. The more active December contract advanced 5.8 cents to $2.411.

November options expire at the end of the trading day Tuesday. November $2 puts were the most active, slipping 1.5 cents to 0.7 cent on volume of 2,565 contracts at 10:47 a.m.

While stockpiles will continue to expand through the first two weeks of November as existing wells add to the glut, the price drop will discourage new drilling, said Tim Evans, an energy analyst at Citi Futures Perspective in New York.

Gas reaching $2 “definitely pressures the producers to cut back on investment, to cut back on drilling and leave a little bit of gas in the ground for later,” said Evans. “In terms of the big-picture, boom-or-bust cycle, we are in the bust phase.”

Inventory Estimates

Gas inventories probably rose by 70 billion cubic feet last week, based on the median of seven analyst estimates compiled by Bloomberg. Estimates ranged from increases of 64 billion to 85 billion. The five-year average gain for the period is 73 billion.

Stockpiles totaled 3.814 trillion on Oct. 16, 13% higher than the the year-earlier levels in the biggest such supply glut for the time of the year since at least 2005, according to the EIA. The government is scheduled to release its next gas storage report on Oct. 29.

Seasonal temperatures from the Rocky Mountains to the East Coast over the next five days will give way to above-normal readings across most of the region on Nov. 1 through Nov. 10, according to MDA Weather Services.

The high in Manhattan on Nov. 5 may be 66 degrees Fahrenheit (19 Celsius), 9 above normal, while Chicago will be 6 degrees warmer than usual, AccuWeather said on its website. About 49% of US households use gas for heating, led by the Midwest and Northeast.

“It’s a bad time to become bearish on natural gas, it really is,” Evans said. “The lower we go, the more of a bargain it represents and the less sustainable the price becomes.”

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