US natural gas futures fall nearly six percent

US natural gas futures fell almost 6 percent on Tuesday, the biggest decline since late December, on forecasts for less cold weather that is expected to reduce heating demand a bit over the next two weeks. After rising to 12-week high last week, front-month gas futures on the New York Mercantile Exchange have so far traded down around 9 percent this week.
The front-month closed down 13.9 cents at $2.257 per million British thermal units. That drop came after the front-month soared 40 percent over the prior three weeks from a 16-year low of $1.684 on December 18. Both the US and European weather models forecast temperatures would remain colder-than-normal over the next two weeks. The latest midday US model however forecast less cold than the morning projection.
For the rest of the winter, Thomson Reuters Analytics forecast temperatures would be 10 percent warmer than normal in February and 14 percent warmer than normal in March due to the warming effect of the El Nino weather pattern. Although analysts forecast utilities withdrew the most gas from storage last week since March, they worried there was not expected to be enough heating demand for the rest of the winter and the power sector was not burning enough gas to drive inventories below 2 trillion cubic feet at the end of the winter heating season in late March.
In early estimates, analysts forecast utilities likely pulled 183 billion cubic feet of gas out of storage during the cold week ended January 8. Over the past five years, storage levels have ended the winter heating season at around 1.6 tcf at the end of March. Analysts have said storage levels below 2 tcf at the end of March were healthy and would likely result in higher gas prices that would encourage producers to drill for more gas.
The power sector has been burning much more gas to generate electricity than normal for over a year as the fuel remains relatively cheap compared with coal, which carries higher environmental and transport costs. In 2015, the power sector consumed a record 26.4 bcfd on average, topping the previous high of 24.9 bcfd set in 2012, according to Thomson Reuters Analytics. Although it is early days for 2016, generators so far this year were using about 25.1 bcfd.