NEW YORK—Gas futures dropped more than 5% to a 28-month low as newly revised weather forecasts reflected a major warming trend, dashing hopes for a surge in cold-weather demand that would alleviate a supply glut plaguing the industry.
Natural gas futures for February delivery were off 16.4 cents, or 5.6%, at $2.777 a million British thermal units in midday trade on the New York Mercantile Exchange.
Several weather forecasters issued revised outlooks Wednesday calling for above-normal and much-above-normal temperatures out as far as late January, particularly for the eastern seaboard and Chicago-to-Boston areas that are key markets for natural-gas fired heating demand. Combined with several analysts' expectations for a below-normal draw on supplies when the latest U.S. stored inventory data comes out Thursday, the market headed for a free-fall.
"As warmer-than-normal conditions eke their way back onto the weather outlooks out toward the end of January, natural gas is being absolutely crushed like a grape," Summit Energy analyst Matt Smith said in a note.
More than half of U.S. homes are heated by natural gas, and it is a component for power plants in electricity generation, which is also used to heat homes. But mild temperatures during what should be peak demand season this fall and winter have depressed demand at the same time that robust production from U.S. shale fields has created record supplies. The result has been an over-supplied market, and prices have dropped 34% in the last six months.
With Wednesday's sharp break lower, analysts are now wondering where there might be a bottom in this market, with ICAP analyst Drew Wozniak asking: "How low can we go?"
On technical charts, the next support level is around the $2.75/MMBtu area. If it breaks through that, many wonder if it could continue falling all the way to the mid-$2 range last seen in 2002
