US natural gas futures fell over 6 percent to the lowest level in almost two weeks on Monday on forecasts for warmer weather through the middle of February that should reduce heating demand. After ending up over 5 percent on Friday, front-month gas futures on the New York Mercantile Exchange closed down 14.6 cents, or 6.4 percent, at $2.152 per million British thermal units. That was the biggest decline since late December.
Gas prices for January fell to the lowest level for the month since 1999 as near-record production at shale formations outpaced demand growth and inventories were at all-time highs. Both the US and European weather models called for warmer-than-normal weather over the next two weeks. That warming trend will likely continue for the rest of the winter with February expected to be about 9 percent warmer than normal and March expected to be about 19 percent warmer than normal, according to long-range forecasts on Thomson Reuters Analytics.
US gas speculators boosted their net short positions for a second straight week as they bet prices would continue to decline on forecasts for weak heating demand for the rest of the winter. Heating demand has been about 14 percent lower than normal so far this winter (November-March) due to the warming effect of the El Nino weather pattern, but that has not stopped gas demand from reaching all-time highs.
That is because the power sector continues to burn record amounts of gas to generate electricity since the fuel remains relatively cheap compared with coal, which carries higher environmental and transport costs. So far this winter, the power sector has burned on average a record 24.6 billion cubic feet of gas per day, according to Thomson Reuters Analytics. That compares with 20.8 bcfd during the extreme cold last winter and the 30-year normal of 18.8 bcfd.
Traders have said it makes sense for generators to burn gas instead of coal when the gas premium over coal is less than $1 per mmBtu, as it has been since August and most of the rest of 2015. US power generation from coal fell to the lowest monthly level in 35 years in November 2015 as generators switched to cleaner and cheaper natural gas, according to federal data.