Natural Gas Falls to 4-Month Low on Outlook Inventories Gained

By Reg Curren

July 30 (Bloomberg) -- Natural gas in New York fell to the lowest in more than four months amid speculation inventories expanded as demand dropped and domestic production increased.

Inventories gained 71 billion cubic feet in the week ended July 25, according to the median of 11 analyst estimates complied by Bloomberg News. The average change for this time of year over the last five is an increase of 55 billion.

``The supply side is outperforming, while the demand side is underperforming,'' said George Hopley, an analyst at Barclays Capital Inc. in New York. ``Demand hit a plateau when we didn't get a heat wave in July.''

Natural gas for September delivery fell 8 cents, or 0.9 percent, to $9.05 per million British thermal unit at 10:52 a.m. on the New York Mercantile Exchange. Futures earlier touched $8.81, the lowest intraday price since $8.664 per million Btu on March 20.

Gas has fallen 32 percent this month and is below its 200- day moving average of $9.517 per million Btu. The fuel is 40 percent higher in the past year and on this day in 2007 closed at $6.499 per million Btu.

``People are giving up on natural gas, believing the highs are over,'' said Stephen Briggs, a partner at Intermarket Management LLC in Verona, New Jersey.

Higher prices have prompted increased exploration and production of natural gas in the U.S., countering a reduction in shipments from Canada and lower imports of liquefied natural gas.

Onshore production in the U.S. is expected to increase 8 percent this year, the Energy Department said in its monthly Short-Term Energy Outlook released July 8. Higher output may prompt lower prices.

More Rigs

The number of onshore rigs exploring for gas and oil in the U.S. reached 1,957 for the week ended July 25, 10 percent more than the same week a year earlier, according to data from Baker Hughes Inc., the world's third-largest oilfield-services provider.

The price rise has put more rigs to work in the U.S. and Canada, which will bring on additional output in the coming months, said Kyle Cooper, an analyst at IAF Advisors in Houston. Even as gas falls below $9, ``that's not going to prohibit drilling,'' he said.

Forecasts call for lower temperatures in the Northeast in the weeks ahead, prompting sale of some gas contracts amid an outlook supplies will expand as demand declined, said Hopley.

``The overnight models are showing heat falling away from the Northeast in the two-week outlook,'' he said.

No Storms

Higher temperatures typically curb storage gains by increasing demand from gas-fired power plants for electricity to run air conditioners. Storms or hurricanes can enter the Gulf of Mexico and pare production from offshore rigs and platforms.

``Traders are more concerned about tropical storm activity this time of year and there's just nothing out there, aside from a little wave off Africa,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``We're seeing more storm premium being pushed out of the market.''

An area of low pressure has formed off the coast of western Africa and may develop into a tropical depression, the National Hurricane Center in Miami said today. No other storm formation is expected in the next 48 hours.

Inventories may end the summer near 3.4 trillion cubic feet, providing adequate supplies for heating needs next winter, analysts have said.

Supplies are 2.396 trillion cubic feet, or 0.9 percent, below the five-year average of 2.418 trillion for this time of year, the Energy Department said July 24.

The department is scheduled to release its weekly inventory report tomorrow at 10:35 a.m. in Washington.

To contact the reporters on this story: Reg Curren in Calgary at rcurren@bloomberg.net.