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Feb. 22 (Bloomberg) -- Natural gas fell, dropping below $5 per million British thermal units for the first time in more than 10 weeks, as milder weather signaled reduced demand for the heating fuel.
Temperatures will be normal in the Midwest in early March after being below normal at the end of February, forecasts showed. Gas production may increase later this year as the number of drilling rigs working in the U.S. has climbed 34 percent from a seven-year low reached last July.
“The focus is entirely on the end of winter, an increasing rig rate, and plenty of supply,” said Tom Orr, research director at Weeden & Co., a brokerage in Greenwich, Connecticut.
Natural gas for March delivery fell 14.8 cents, or 2.9 percent, to $4.896 per million Btu at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. A settle at that price would be the lowest since Dec. 4.
“I think people are getting too negative,” Orr said. “The break below $5 may set up a snap-back rebound.”
Forecasts for normal temperatures across the Chicago region March 4 through March 8 replaced predictions for colder-than- normal weather, according to MDA Federal Inc.’s EarthSat Energy Weather. About 72 percent of Midwest households rely on gas for heating.
The gas-rig total last week rose to 893, the highest level since March 6, Baker Hughes Inc. data show.
Weak Demand
“Weather becomes a factor, the market is oversupplied and demand is still weak,” said Fadel Gheit, director of oil and gas research at Oppenheimer & Co. in New York. “So far, we haven’t seen what we thought would be a significant decline in production.”
An Energy Department report on Feb. 18 showed that gas supplies were 2.7 percent above the five-year average with about six weeks to go until the end of the winter withdrawal period for natural gas.
The 12-month New York strip price, an average price of futures for the next year, fell 14.4 cents, or 2.6 percent to $5.351 per million Btu in New York.
“The rule of thumb is that most producers will feel the pressure when we get to $4.50 on the 12-month strip; that is really the threshold of pain,” Gheit said. “We’re still above that.”
U.S. gas storage levels drop during the cold-weather months, when demand exceeds production and imports. The decline in March is typically half the drop in February, Energy Department data show.
U.S. imports of liquefied natural gas may rise 44 percent in 2010 to about 1.83 billion cubic feet per day, the Energy Department predicted on Feb. 10.
Economic Recovery
“We advise investors to avoid investing in natural gas as U.S. drilling activity is gearing up again,” Dominic Schnider, a commodities analyst at UBS AG’s wealth management group, said in a report.
Futures were also pressured lower on concern the economic recovery will be sluggish, Michael Fitzpatrick, vice president of energy at MF Global in New York, said in a note to clients.
“We have been arguing that gas will have difficulty rising until industrial demand, which is a major component of the price matrix, returns,” he said.
Industrial demand for gas slid 9.3 percent in the first 11 months of 2009 as the worst recession since the 1930s shuttered factories in the U.S. Purchases by industrial users account for about 29 percent of total consumption.
“We expect natural gas demand in the U.S. to grow only 0.6 percent over 2009,” UBS’s Schnider said. “The overall increase is unlikely to save prices from falling.”
He said gas would be a buy for investors at around $4 per million Btu.
To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net
Last Updated: February 22, 2010 14:44 EST
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