US gas price drop signals shift in winter risk

US natural gas futures plunged by 20pc during the first week of December, dropping below $4/mmBtu, as mild weather undermines expectations for winter demand.

Nymex gas for January delivery at the Henry Hub collapsed on 6 December to a five-month settlement low of $3.657/mmBtu, down from$4.567/mmBtu at the end of November and about a third lower than the settlement ahead of the US Thanksgiving holiday. That sharp decline in prices reflects expectations for mild weather well into December that should keep winter heating needs below seasonal norms.

"We have no weather," said Stephen Schork, president of the energy consultancy Schork Group. Nearly a quarter of the heating season is over, and "we have no demand," he said.

A sluggish start to the five-month-long winter heating season, which lasts through March, has spurred market participants to reassess the risk related to winter demand. The mild weather has truncated the winter, leaving more gas available in storage to handle cold weather in January and February.

Meteorologists with the private forecaster Maxar are predicting above-normal temperatures across most of the US next week and in the eastern two-thirds of the US on 11-21 December. Those above-normal temperatures could trim withdrawals from storage, moving low inventories above average levels by the week ended 17 December, analysts with Gelber & Associates said this week.

US gas Inventories, which have been lagging average levels, can buffer gas prices against spikes in demand or supply shortfalls. Mild weather last Autumn and in November, the first month of the heating season, has already allowed stockpiles to close in on average levels. Gas-weighted heating demand last month was 2pc below the seasonal norm, according to the National Weather Service.

US gas inventories as of 26 November were 3.564 Tcf (101bn m³) — 2.4pc lower than the five-year average and 9.5pc lower than a year earlier, according to the US Energy Information Administration (EIA). Stockpiles were 7.4pc below the five-year average in early September. The agency today said that it expected stockpiles to finish March about 2pc lower than the five-year average, compared with its estimate last month for stocks to end 4pc below that measure.

Cold weather could still rear up in the coming months, driving prices higher. Only two of the past five mild Decembers led to a mild January, according to analysts with Energy Aspects.

Last winter's mild weather veered off course in February, when bitter cold caused demand to spike and shuttered output from key producing states such as Texas and Louisiana. The frigid weather drew inventories to below-average levels and caused spot prices at the Henry Hub to rocket higher, reaching a peak on 17 February near $24/mmBtu.

By Jason Womack