Natural gas drops below $2 for first time since 2002 on glut

April 11 (Bloomberg) -- Natural gas futures in New York dropped below $2 per million British thermal units for the first time in a decade on a growing supply glut caused by mild weather and record production.

Gas is down 34% this year, making it the worst performer on the Standard & Poor’s GSCI commodity index. U.S. stockpiles last month were at an all-time high for the season after the lower 48 states experienced the warmest March on record. Production has climbed, driven by gains at shale formations from Texas to Pennsylvania.

“There’s no fancy logic or spin required, it’s very clearly bearish and that’s why prices are at 10-year lows,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “Producers are under increased pressure to shut production.”

Natural gas for May delivery slid 4.7 cents, or 2.3%, to $1.984 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Jan. 28, 2002.

May $2.25 calls, bets that prices will rise, were the most active options in electronic trading on the exchange. They fell 0.3 cent to 1.2 cents per million Btu on volume of 611 contracts at 3:14 p.m.

The price discount, or spread, of the May contract to June futures held steady at 12.1 cents.

More than 15,000 temperature records were broken in the continental U.S. last month, according to the National Oceanic and Atmospheric Administration. Temperatures averaged 51.1 degrees Fahrenheit (10.6 Celsius), 8.6 degrees above the 20th century average, the warmest March in data going back to 1895.

Heating Demand

Temperatures during the heating season from October through March were 3.8 degrees above average, making it the second- warmest for the period on record after 1999-2000, the government agency said.

U.S. heating demand this winter was 18% below normal through April 7, according to Weather Derivatives in Belton, Missouri. About 51% of U.S. households use gas for heating. Fuel consumption typically slumps after the winter heating season ends and before hot weather drives demand from power plants to run air conditioners.

U.S. stockpiles totaled 2.479 trillion cubic feet in the week ended March 30, a high for that time of the year, according to the Energy Department. A surplus of the fuel to the five-year average widened to 61%, the most in six years, from 59% the previous week.

Stockpile Gain

Inventories expanded by another 21 billion cubic feet last week, 1 billion below the five-year average, according to a median of 21 analyst estimates compiled by Bloomberg. The department is scheduled to release its gas inventory report for the week ended April 6 tomorrow.

“The supply overhang doesn’t seem to be abating,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania.

The amount of gas in storage may reach a record by the end of October, the department said yesterday in its monthly Short- Term Energy Outlook.

U.S. gas output increased by 0.8% in January to 83.17 billion cubic feet a day from the previous month, led by gains in the Marcellus shale in Pennsylvania and Ohio, the Energy Department’s Energy Information Administration said in its monthly EIA-914 report on March 29. Production in 2011 was a record 28.6 trillion cubic feet.

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