US natural gas futures on Tuesday dropped over 10 percent, the most in almost three years, on forecasts for temperatures to moderate after a brief cold blast expected this week. Front-month gas futures for February delivery on the New York Mercantile Exchange fell 39.7 cents, or 10.7 percent, to settle at $3.327 per million British thermal units, its lowest close in two weeks.
That was the front-month's biggest daily percentage decline since February 2014, putting the contract down over 17 percent from a two-year high of $3.994 per mmBtu set just last week. "The natural gas market has dropped as the temperature outlook has turned noticeably warmer than a few days ago," Tim Evans, Citi Futures' energy futures specialist, said in a note.
The latest weather forecast projected temperatures across much of the United States would fall to well below normal levels from January 5-14. Longer-term forecasts after that, however, called for the weather to turn warmer than normal through March.
Changing winter forecasts have also had a major impact on the March-April spread over the past couple of months. The premium of March over April soared from 2.1 cents on November 11 to 24 cents on December 9, then collapsed 78 percent in the seven trading days through December 20 to a low of 5.4 cents before tripling to a high of 17.8 cents by December 28 and then dropping by 82 percent over the past three days to 3.2 cents on Tuesday.
Thomson Reuters projected the cold expected this week would boost US gas demand to 99.8 billion cubic feet per day this week and 110.6 bcfd next week from an average of 90.9 bcfd last week. In early forecasts, analysts said utilities pulled 80 billion cubic feet of gas from storage during the warmer-than-normal Christmas and New Year's holiday week ended on December 30.
That compares with declines of 237 bcf in the prior week, 98 bcf a year earlier and a five-year average of 107 bcf for that week. Analysts forecast storage would fall more quickly than normal this winter in part because drillers for the past several weeks have been producing much less gas than in prior years. US output averaged 70.8 bcfd over the past 30 days, compared with 72.7 bcfd a year earlier, 72.4 bcfd for the same period in 2015 and 66.5 bcfd in 2014, according to Reuters data. In the past week, however, production rose to 71.3 bcfd with prices in the Marcellus and Utica shale basins in Pennsylvania, Ohio and West Virginia near their highest in two years.
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