NEW YORK: US natural gas futures fell sharply on Wednesday, with forecasts for much milder weather next week driving the front-month December contract down more than 3 percent ahead of its expiration later in the session.
Traders mostly shrugged off the cold snap this week even though it helped drive Henry Hub cash prices to 14-month highs, focusing instead on forecasts that call for much milder weather during at least the first week of December.
"Natural gas futures are breaking to the downside ahead of today's December futures expiration, with an increased focus on the imminent warming trend," Citi Futures energy analyst Tim Evans said in a report.
At 12:45 p.m. EST (17405 GMT), front-month December gas futures on the New York Mercantile Exchange were down 12.1 cents, or 3.2 percent, at $3.648 per million British thermal units after trading between $3.626 and $3.769.
The nearby contract hit a 13-month high of $3.933 on Friday, but some traders cautioned that gas prices near $4 could increase supply by encouraging producers to turn on more wells and could dampen demand by making gas less competitive with coal for power generation.
Despite some chilly weather this week that kicked up demand, few traders expected much upside in prices until more sustained cold arrives, with gas storage and production still near record highs.
"While the ... potent early December warmth remains on track today, the forecast did take on some increased uncertainty during the second half of the (six- to 10-day) period with some cooler changes there," private forecaster MDA Weather Services said in its morning report.
STORAGE SURPLUS NEARLY GONE
Traders and analysts were waiting for the next US Energy Information Administration storage report on Thursday, with most expecting inventories to have fallen by 12 billion cubic feet last week, according to a Reuters poll.
Stocks rose 2 bcf during the same week last year, while the five-year average for that week is an 18 bcf decline.
EIA data last week showed total gas inventories for the week ended Nov. 16 fell by 38 bcf to 3.873 trillion cubic feet.
It was the second withdrawal of the heating season, but current stocks are still at record highs for this time and offer a comfortable cushion to meet any winter spikes in demand or unexpected disruptions in supply.
Storage hit a record high of 3.929 tcf two weeks prior, making this the fourth straight year that gas inventories have headed into the heating season at a record high.
The storage surplus compared with a year-ago, which began the stock building season in April at nearly 900 bcf, is now at 24 bcf and is likely to fall below year-ago levels in next week's report, the first time below that benchmark since early November 2011.
RIG COUNT RISES FOR SECOND WEEK
Drilling for natural gas has mostly been in decline for the last year, with gas rigs down 54 percent since peaking last year at 936 in October 2011.
The steep slide - the Baker Hughes gas rig count hit a 13-1/2-year low just three weeks ago - has fed expectations that producers might curb record output. But so far production has not shown any significant signs of slowing.
The associated gas produced from more-profitable shale oil and shale gas liquids wells has kept dry gas flowing this year at or near a record pace.
Recent gains in the rig count have stirred concerns that higher gas prices might prompt producers to ramp up supply.