Natural Gas Closes Below $5 As U.S. Heating Demand Falls

The United States is about to experience bone-chilling temperatures, but not quickly enough for bulls on the natural gas market, who endured another markdown in prices of the fuel on Thursday, this time below the critical $5 threshold, following poor statistics on heating demand.

The U.S. Energy Information Administration, or EIA, said that U.S. utilities drew 87 billion cubic feet, or bcf, from natural gas storage during the week ending December 16, compared to market expectations of 93 bcf.

"Even though a major Polar blast will dominate much of the United States over the next few days and bring wind chills to nearly 0 degrees (Fahrenheit) in far southern locations like Houston, Texas, the [pre-] warm-up appeared to be more of a driver than the bitter cold event," Gelber & Associates, a Houston-based energy markets consulting firm, said in a note to clients.

Natural gas for delivery in January settled at $4.99 per million British thermal units, or mmBtu, on the Henry Hub of the New York Mercantile Exchange, down 34.2 cents, or 6.4%. It hit a session low of $4,984 per mmBtu earlier, reaching a level not seen since October 27.

Gas futures have lost around 30% over the past four weeks. Prior to that, the market increased by about 20% between mid- to late-November due to forecasts that the whole United States will experience sub-freezing temperatures during the week between Christmas and New Year's.

The Global Forecast System, the preferred weather forecasting model for the United States, and the ECMWF, the default version used for Europe, both indicate that temperatures will moderate from the beginning of the following week through the beginning of January. In contrast to what two models predicted for this Friday through the end of the year, temperatures will not be extremely low.

John Kilduff, a partner at the New York-based energy hedge fund Again Capital, remarked, "This is one of the most unpredictable seasons for end-of-year weather forecasting I've seen in years." It explains the volatile month we've experienced.

Gelber & Associates agreed with Kilduff and stated:

Because longer-range weather forecast models indicate another large Arctic outbreak during the second week of January, it appears that upside potential outweighs additional downside danger.

"Until the gas market is presented with some fresh bullish price-setting mechanisms, more erratic price behavior is likely to persist over the next week through the New Year's holiday, since overall market activity will be low, leaving the door open for wildly fluctuating prices."

In order to sustain a protracted increase in gas prices, dry gas production must also decrease dramatically, according to the firm.

In terms of output, dry gas volumes remain close to 99 bcf per day, down from a November peak of approximately 102 bcf/d, with further losses likely to result from extensive freezing of production wells. Nevertheless, production is still up approximately 1.5 bcf/d year-over-year, making traders reluctant to back a rebound in gas prices at this time.