Natural Gas Prices Sink on Smaller-Than-Expected Stockpile Drain

By Timothy Puko 

Natural gas closed at its lowest price in more than two years after federal data showed U.S. storage levels fell far less than expected last week.

Storage levels shrank by 94 billion cubic feet in the week ended Jan. 23, the U.S. Energy Information Administration said. That 17 bcf less than the 111-bcf average of 20 forecasters surveyed by The Wall Street Journal, none of whom predicted such a small drain.

Prices sank as soon as the data came out. The front-month March contract settled down 12.3 cents, or 4.3%, at $2.719 a million British thermal units on the New York Mercantile Exchange. This is the lowest front-month settlement since Sept. 7, 2012, when gas fell to $2.682/mmBtu.

The drain was 44% lower than the five-year average for that week of the year. That is another reminder of how severely oversupplied the market is, said Stephen Smith, an energy consultant based in Natchez, Miss. UBS AG cut its price forecast for gas earlier this week, saying the market is oversupplied by about 2.5 bcf a day.

"You might get weather situations that make it...look like a balanced market," Mr. Smith said. "The truth is, underlying this whole thing, you can't grow production (at this) rate and not be oversupplied."

The drain brought storage levels to 2.5 trillion cubic feet, 15% more than a year ago and 3% below the five-year average.

The fall to 2012 prices is significant, said Teri Viswanath, a natural-gas strategist at BNP Paribas SA in New York. After a mild winter that year, the strong supply coming from the U.S. shale gas boom crashed the market, sending prices below $2/mmBtu.

Milder weather reports also came in in the afternoon, suggesting softer demand for gas heat in the coming weeks, Ms. Viswanath added. She said early pipeline data suggests a 125-bcf withdrawal for next week's storage update, and that would be a quarter lower than the five-year average for the week, according to EIA data.

"The question is whether this will lead to the same precipitous collapse that we had" in 2012, Ms. Viswanath said. "This is a real problem."

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