Natural Gas Drops on Outlook for Weaker Economy, Lower Demand

By Reg Curren

Oct. 24 (Bloomberg) -- Natural gas futures fell in New York, dropping along with crude oil and gasoline, on concern demand for energy will decline as the world economy slows.

About 40 percent of natural gas demand in the U.S. originates with commercial and industrial consumers, who tend to cut back in times of economic weakness. Crude declined after OPEC's decision to cut oil output did little to shake the perception that there's enough oil to meet demand.

``The economic news out of the U.K. and with crude down to a new low, gas has to go to a new low,'' said Tom Orr, research director at Weeden & Co. in Greenwich, Connecticut.

Natural gas for November delivery fell 18 cents, or 2.8 percent, to settle at $6.239 per million British thermal units at 3:02 p.m. on the New York Mercantile Exchange. The futures haven't settled this low since Sept. 21, 2007, when they closed at $6.08. Prices had their fourth weekly decline in five weeks.

``Gas may go and test the $5.30 level from late August 2007,'' Orr said. ``There's a big, mass, coordinated slowdown. No one wants to own anything and panic abounds.''

Economists at Deutsche Bank AG expect the Group of Seven economies, which includes the U.S. and U.K., to contract 1.1 percent next year. The U.K. government said today the country's economy shrank more than forecast in the third quarter as the financial crisis mounted, putting the country on course for its first recession since 1991.

``Equity markets are the big gorilla in the room and commodities are following them as a beacon on the economy,'' said Chris Jarvis, president of Caprock Risk Management LLC in Hampton Falls, New Hampshire. ``Global recession fears are at an apex right now.''

Falling Stocks

Stocks slumped around the world amid speculation the slowdown reduce earnings. The Standard & Poor's 500 Index slid as much as 6.1 percent and the Dow Jones Industrial Average dropped almost as much. The U.K.'s FTSE 100 Index sank 5 percent.

A slowing economy may push oil as low as $50 a barrel and that will drag other energy prices, including natural gas, lower, said Jarvis.

``This is all recession-based fear,'' he said. ``Everybody is trying to ascertain the degree of the slowdown.''

Crude oil futures in New York declined $3.69, or 5.4 percent, to $64.15 a barrel, the lowest since May 31, 2007.

U.S. petroleum-fuel demand fell 8.5 percent last week from a year earlier, the Energy Department said Oct. 22.

OPEC's Decision

The Organization of Petroleum Exporting Counties decided to cut production targets by 1.5 million barrels a day, the first reduction in almost two years, in an attempt to stem the decline in oil prices.

``Gas storage is less than last year's record, though more than adequate, particularly with the expectation that industrial demand will take a hit,'' Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York, said in a note today.

Stockpiles advanced 70 billion cubic feet in the week ended Oct. 17 to 3.347 trillion cubic feet, the Energy Department said yesterday. Sufficient supplies in storage help utilities and large industrial consumers meet demand during the cold-weather season, when usage outstrips production.

Supplies now top the five-year average of 3.327 trillion cubic feet that's on hand at the start of the heating season in early November, when 52 percent of U.S. homes count on gas to keep them warm. Inventories reached a record 3.545 trillion cubic feet a year earlier.

EnCana Corp., Canada's biggest natural gas producer, said pipelines in British Columbia damaged in bombings earlier this month have been repaired and shipments on them have resumed.

A 12-inch pipe able to send 60 million cubic feet of gas a day, and an 8-inch line, moving 40 million a day, returned to service over the past few days after testing, Alan Boras, a spokesman for the Calgary-based company, said today in an interview.

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