Gas futures slide 6.9% after build in supply

NEW YORK (MarketWatch) -- Natural gas futures plunged Thursday, dragged lower by a larger-than-expected increase in U.S. supplies and steep declines in the crude oil market.

Natural gas for June delivery settled 31.6 cents, or 6.9%, lower, at $4.261 a million British thermal units on the New York Mercantile Exchange, the lowest ending price since April 18.

Gas futures touched three-month highs early Monday, but have since pulled back as traders bet that the increased gas use seen in late April will fade this month with spring's dip in demand for the fuel. Thursday's report of a larger-than-expected weekly build in U.S. gas stockpiles provided an excuse for traders to cash out.

"When you have a bubble that has a lot of air, eventually it's going to deflate by quite a bit," said Kent Bayazitoglu, an analyst with Houston-based Gelber and Associates. "This is a reaction to some overzealous buying."

The previous three weekly injections into storage had come in below market expectations, catching traders off guard and sparking quick rallies.

But market participants had positioned themselves for a similar surprise this week, and futures fell immediately after the Energy Information Administration's report that 72 billion cubic feet of gas was added to storage last week. Analysts in a Dow Jones Newswires survey had predicted a build of 67 bcf.

Traders wanted "to avoid getting caught short again," said Jason Schenker, president of Prestige Economics in Austin, Texas.

Last week's gas injection fell short of the 78 bcf five-year average build and last year's 83 bcf build. Inventories as of April 29 stood at 1.757 trillion cubic feet, 1% below the five-year average, and 11.4% below 2010 levels.

An unusually large amount of maintenance at nuclear power plants and some late season heating needs had lifted natural gas demand, but many of those idled plants are expected to return to service this month. Natural gas-fired power stations are frequently called upon to pick up the slack when nuclear plants are offline.

The weather outlook also weighed on the market. Mostly mild seasonal temperatures forecast for the coming weeks are seen leaving less demand to cool or heat homes and businesses. Gas use typically reaches a seasonal low in the spring, before summer's heat increases the need for gas-fired power to run air conditioning.

Average temperatures in key gas-consuming cities Chicago and New York City are expected to be just short of 60 degrees Fahrenheit this weekend, with the mild weather expected to stretch through next week, private forecaster MDA EarthSat said.

Futures were also under pressure from a selloff in crude oil.

Benchmark crude oil futures on Nymex Thursday had their largest single-day percentage drop since April 2009, falling below $100 a barrel.

"We've seen these markets go in opposite directions for much of this year," Bayazitoglu said. "But when you see oil fall as much as it did, it drags gas down with it."

(Source: http://www.marketwatch.com/story/gas-futures-slide-69-after-build-in-supply-2011-05-05)