Natural Gas at $2.692 MMBtu

By Reg Curren

Aug. 27 (Bloomberg) -- Natural gas fell in New York as a government report showed that U.S. supplies expanded last week more than analysts estimated, keeping inventories on a pace that will strain storage capacity.

Inventories gained 54 billion cubic feet to 3.258 trillion in the week ended Aug. 21, the Energy Department said. Analysts forecast an increase of 52 billion. Stockpiles typically climb 67 billion cubic feet for the week over the past five years. Gas touched $2.692, the lowest level since Aug. 8, 2002.

“Lots of gas equals low prices,” said Ellen Hannan, an energy analyst at brokerage Weeden & Co. in Greenwich, Connecticut. “It’s good to be a gas consumer today, not a producer.”

Natural gas for September delivery fell 6.7 cents, or 2.3 percent, to settle at $2.843 per million British thermal units at 3:01 p.m. on the New York Mercantile Exchange. Gas has declined 50 percent this year.

The more actively traded October futures dropped 8.8 cents to $3.206 per million Btu. The September contract expired today.

Supply increases may be higher than forecast as producers are able to find additional space after the Energy Department increased its estimate on available storage by 100 billion cubic feet, Hannan said.

“If we were this full, I would expect to see injections around 41, 42 or 43 billion” as producers cut supplies, she said. “If we have added 100 billion, there’s more capacity to inject.”

Hannan said industrial demand will have to rebound to begin working down the surplus of gas. The economy hasn’t yet provided that lift, she said.

Storage Capacity

Peak capacity to store natural gas will probably reach about 3.9 trillion cubic feet this year, about 100 billion more than in 2008, Jose Villar, an economist at the Energy Department’s Energy Information Administration, said yesterday.

“I’ve tried to guess a bottom on this market a thousand times and it just keeps getting crushed,” said Carl Neill, an energy analyst at Risk Management Inc. in Chicago. “We have a lot in storage. I don’t know what will turn it.”

Overall U.S. gas consumption may contract by 2.6 percent as the recession that began in December 2007 cuts demand, the department said in its Short-Term Energy Outlook on Aug. 11.

Gas use at factories is forecast to tumble 8.6 percent this year because of the recession, the department said.

“In some regions, capacity will be reached so supply gets backed to the producer and you get depressed prices,” Jim Ritterbusch, president of Ritterbusch & Associates, a Galena, Illinois, energy consultant, said before the report. “It’s going to take an event to change anyone’s mind about storage. It would have to be a storm capable of taking 100 billion to 200 billion cubic feet off the market.”

Hurricane Threat

No storms are forecast at this time to threaten natural gas output in the Gulf of Mexico, according to the National Hurricane Center in Miami.

The Atlantic hurricane season, which began June 1 and runs to the end of November, hasn’t produced a storm that has made its way into the energy-producing region of the Gulf.

“From a fundamental standpoint, the weak to null hurricane season is certainly adding to the bearish picture,” Laurent Key, an analyst at Societe Generale in New York, said in a report yesterday.

Stockpiles of gas this fall will probably exceed the record of 3.545 trillion cubic feet in storage reached on Nov. 2, 2007, according to Energy Department estimates.

Inventories will probably reach 3.9 trillion cubic feet by the end of October, keeping prices depressed as excess gas clogs the pipeline and storage network, Ritterbusch said.

Warmer Winter

Gas demand may not rise as much as some are anticipating when the winter arrives because the northern half of the country will have higher-than-normal temperatures, Travis Hartman, a meteorologist at MDA Federal Inc.’s EarthSat Energy Weather, said in an interview in Calgary today.

“The Midwest and Northeast have the greatest chance of departure from the 30-year normal,” he said. “Once we get to the winter months we’ll have a moderate El Nino” boosting temperatures above average in cities like Chicago.

About 72 percent of households in the Midwest rely on natural gas for heating. Mild weather there would slow the reduction in the supplies and keep prices depressed.

El Nino is a warming of the ocean surface off the western coast of South America. The phenomenon affects the jet stream, alters storm tracks and creates unusual weather patterns.

To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net.
Last Updated: August 27, 2009 15:19 EDT