NEW YORK (Reuters) - U.S. natural gas futures ended below $2 per million British thermal units on Wednesday for the first time in more than 10 years as extended mild weather forecasts plus worries about record-high supplies pressured prices.
It was the third straight day that the nearby contract struck a 10-year low, after one of the mildest winters on record sharply stunted demand for gas and sent prices spiraling lower.
With inventories driven to all-time highs by record production from the booming U.S. shale gas sector, traders say a further price drop is expected this spring, at least until hotter temperatures bolster demand by forcing consumers to crank up their air conditioners.
“We had the warmest March on record, now we’re struggling with (mild) shoulder-month weather. People are looking out at the injection (inventory building) season and are concerned there may not be enough space to store gas,” said Tom Saal, senior vice president at INTL Hencorp Futures in Miami.
The sharp drop in gas prices — down about 33 percent so far this year — has been a boon to homeowners and businesses and has increased demand from utilities and industry. But some dry gas producers have been forced to sell at below cost.
The front-month gas futures contract on the New York Mercantile Exchange finished down 4.7 cents, or 2.3 percent, at $1.984 per mmBtu after sinking late to $1.976, he lowest for the nearby contract since January 2002.
Most analysts contacted by Reuters have sharply lowered their price expectations for this year, with estimates ranging between $2 and $3 from a $3.30 average in a Reuters poll released in late January.
“We expect to see $2 gas prices through this summer if the weather doesn’t get very hot,” Steve Mueller, chief executive of gas producer Southwestern Energy, told Reuters on Wednesday.
After a chilly start to the week, AccuWeather.com expects temperatures in the Northeast and Midwest, key gas-consuming regions, to warm to above normal later this week and early next week, but highs in the high-60s and low-70s degrees Fahrenheit area were not likely to stir much heating or cooling load.
Utilities typically build inventories from April through October to help meet peak winter heating needs, but this year storage injections started a couple of weeks early.
Data last week from the Energy Information Administration showed that domestic gas inventories for the week ended March 30 rose to 2.479 trillion cubic feet, a record high for this time of year and a whopping 55-60 percent above last year and the five-year average for that week.
The huge surplus, which could prove to be the biggest factor pressuring prices this year, is expected to grow again in this week’s report, with stocks estimated to have increased by 25 billion cubic feet, according to a Reuters poll on Wednesday.
<Storage graphic: link.reuters.com/mup44s)
Storage finished March near 2.5 tcf, about 60 percent, or 950 bcf, above normal and easily above the previous March 31 record of 2.148 tcf from 1983.
The huge inventory overhang could drive prices lower this spring as seasonal weather demand fades, then pressure prices again later in the injection season if storage caverns fill to capacity and force more gas into a well-supplied market.
The U.S. Energy Information Administration Short-Term Energy Outlook on Tuesday offered little hope for bulls, with the agency sharply raising its estimate for marketed gas production this year for a third straight month.
EIA expects 2012 gas output to climb by 3 billion cubic feet per day, or 4.5 percent, to a record 69.22 bcfd, up from its March outlook that had output this year at 67.91 bcf daily.
EIA also forecast a significant 2.8 bcfd, or 4.3 percent, gain in consumption this year, primarily due to more utility switching from coal to cheaper gas, but it was not expected to be enough to tighten an oversupplied gas market.
The agency said it expected production growth to slow this year as low prices hit plans for new drilling, but it noted the sharp decline in the Baker Hughes gas rig count — down about 31 percent since peaking at 936 in October — has not yet reduced output partly due to increased drilling efficiency.
The gas-directed rig count has fallen in 12 of the last 13 weeks, sinking last week to its lowest in nearly 10 years, but rising output from shale has kept production on an upward track.(Graphic on rigs vs prices: r.reuters.com/dyb62s)
Horizontal rigs, the type most often used to extract oil or gas from shale, fell for the second time in three weeks, slipping 15 to 1,165, but the count is not far below the all-time high of 1,185 hit in late January.
The share of horizontal rigs drilling for gas has fallen to 38 percent from 78 percent just two years ago, but analysts say any slowdown in production could take a lot more time, noting increased drilling for more profitable oil and liquids-rich prospects still produces plenty of associated gas.
Some analysts say the gas-directed rig count may have to drop below 600 to reduce flowing supplies significantly. Most analysts do not expect any major slowdown in gas output until later this year.
EIA did offer some chance that the market might be better balanced next year, with production forecast at nearly flat after seven straight yearly gains, while consumption is expected to grow by about 1.4 percent.
Additional reporting by Eileen Houlihan and Edward McAllister in New York; Editing by John Picinich and Jim Marshall