Natural Gas Stockpiles Near Record Highs, Pushing Price Down

Unthreatened production in the Gulf of Mexico also plays a part

One day before the filing of an Energy Department report expected to show that U.S. natural gas stockpiles increased by 55 billion cubic feet last week, natural gas futures have slumped.  The economy is too weak to accommodate the excess supply, which was predicted by 16 analysts and compiled by Bloomberg.

62 billion cubic feet is the average five-year increase for natural gas supplies, and last week’s inventories were 6.2 percent above average.

This afternoon on the New York Mercantile Exchange, natural gas contracts for October delivery had dropped 8.7 cents, or 2.3%, to $3.729 per million British thermal units (BTUs).  Earlier in the day, the futures traded for as low as $3.708.

Stockpiles of natural gas are predicted to come close to record highs by the end of October, according to the Energy Department; inventories are predicted to reach 3.752 trillion cubic feet. This excess has caused natural gas to decline 33% so far this year.  November 2009 saw stores of natural gas reach 3.84 trillion cubic feet, which is the current record.

According to Lannie Cohen, president of Capitol Commodity Services in Indianapolis, “There’s still more natural gas than they know what to do with.  This thing could make another move downward in the next few days.”

The 14-day relative strength index for natural gas fell to 30.3, marking its third day above 30.  A score of 30 often indicates a price increase, whereas a score of 70 on the index often signals a coming decline.  The index is used to help analysts know whether any given security has risen or fallen too far.

This hurricane season has thus far not threatened natural gas production in the Gulf of Mexico at all, which has further impacted prices.  Ten percent of U.S. natural gas is produced in the Gulf of Mexico.  “It’s been that way for a while,” according to Larry Young, president of Covenant Trading in Chicago.  “We’ve dodged bullets so far on hurricanes.”

Simple supply and demand dictates that prices will remain low as long as stores of natural gas remain high and production is unthreatened.  According to Michael Rose, director of trading for Angus Jackson Inc. in Fort Lauderdale, Florida, “Traders see there’s no demand in the immediate future, and that’s what we’ve been talking about for months….We need demand.”