US GAS: Futures Push Lower As Focus Remains On Weak Demand

Published: Jan 26, 2012

By Dan Strumpf
Of DOW JONES NEWSWIRES


NEW YORK (Dow Jones)--Natural gas futures fell sharply Thursday, halting a rally that had lasted all week, as traders focused on the likelihood of weak demand for the remainder of the winter.

Futures fell in spite of a government report that showed a bigger-than-expected drop in natural gas inventories, implying higher demand for the fuel.

Market participants said such a big drawdown in stocks is unlikely to be repeated in the coming weeks, as continued mild weather likely keeps a lid on gas-fired heating demand.

"For the most part, that was a one-off shot," said Kyle Cooper, managing director of IAF Advisors, of the inventory drop. "Mother nature remains very, very bearish."

Natural gas for February delivery settled down 12.4 cents, or 4.5%, at $2.605 a million British thermal units on the New York Mercantile Exchange.

Futures traded in a wide range Thursday, climbing as high as $2.803/MMBtu following the Energy Information Administration's weekly inventory report. The report said natural gas inventories during the week ended Jan. 20 fell 192 billion cubic feet.

The figure was above the 176-bcf average draw anticipated by analysts polled by Dow Jones Newswires. It also topped the five-year average withdrawal of 173 bcf for the week.

The sizeable decline was likely due to a recent bout of cold weather and increased use of natural gas by power plants, according to a report by analysts from Citigroup.

Still, inventories remain at their highest level ever for this time of year. Roughly half of all U.S. homes are heated with natural gas, and the milder-than-usual winter has squelched usage and sent prices sliding.

Even in the face of weak demand, production remains elevated--especially in so-called shale formations, where new drilling technologies have unlocked a flood of cheap gas.

The combination of high supply and weak demand have sent gas prices sliding for months, falling last week to as low as $2.322/MMBtu, their weakest level in 10 years.

Consumption shows few signs of picking up. Forecasts from the National Oceanic and Atmospheric Administration show above-normal temperatures lingering through much of the country through early February.

Thursday's retreat halts a rally spurred by announcements by major producers that low prices were forcing production cuts. Chesapeake Energy Corp., ConocoPhilips and Occidental Petroleum all announced a pullback this week.

Others are following suit. On Thursday, EQT said it will stop drilling new wells after existing ones in progress are complete. Consol said it plans to cut back on drilling plans in the Marcellus Shale.

Still, many market observers say the retrenchment isn't yet enough to meaningfully curb the torrid pace of natural gas production in the U.S.

"You can't get around the fact that there is a lot of gas out there," said John Woods, head of gas trading firm JJ Woods Associates.

-By Dan Strumpf, Dow Jones Newswires; 212-416-2818; dan.strumpf@dowjones.com