Updated from 2:40 p.m. EST
Natural gas prices fell to a six-month low Thursday after a government report showed a smaller-than-expected drawdown in inventories of the fuel.
Natural gas closed down 25 cents, or 3.3%, to $7.47 per million British thermal units, extending a slide that has taken the price 33% lower since the start of January.
The Energy Department said natural gas in storage dropped 38 billion cubic feet to 2.36 trillion cubic feet last week, a seasonally small drawdown. Natural gas in storage is now 22% above last year and nearly 38% above the five-year average.
Mild weather likely limited the drawdown last week because consumers and companies didn't have to heat their homes as much. Analysts surveyed by
had expected declines ranging from 53 billion to 61 billion cubic feet.
Last month was the warmest January on record, with temperatures 25% above normal, according to the U.S. National Climatic Data Center. The average temperature last month was 39.5 degrees Fahrenheit.
Cold weather is expected to return to the Northeast, the nation's largest market for heating fuels, this weekend. Below-normal temperatures are projected across the western, central and northeastern U.S. from Feb. 14 to 18, according to the U.S. Climate Prediction Center. Despite the threat of cold weather, heating oil closed down less than 1 cent to $1.66 a gallon because of ample inventories. Distillates, which include heating oil, fell by 300,000 barrels last week, but are 12.4% above last year.
After falling for two days, oil eked out a 7-cent increase, or 0.1%, to settle at $62.62 a barrel. Crude has now lost all the ground it picked up this year, as ample supplies and warm weather have eased supply concerns. On Wednesday, the Energy Department said crude inventories dipped 300,000 barrels to 320.7 million last week. Still, the drop was modest because supplies are 10.7% above the same period last year.
"We saw this week's report as being neutral," said Peter Beutel, an oil analyst with Cameron Hanover in New Canaan, Conn. "Distillate and crude oil stocks have healthy surpluses against a year ago, but we do have a heavy maintenance round coming up, soon."
Geopolitical worries that had roiled the markets over the past two weeks have largely dissipated as traders focused on robust supplies. The markets had been worried that a standoff with Iran over its nuclear development activities would cut world oil supplies and drive up prices.
A meeting between Russian and Iranian diplomats to forge a compromise may relieve some of the tension next week. The Russians have offered to enrich uranium on Tehran's behalf to head off a possible trade embargo against Iran. Last Saturday, the International Atomic Energy Agency referred Iran to the Security Council for possible economic sanctions.
Unleaded gasoline slid 3 cents, or 2%, to $1.51 a gallon and returned to December levels. A 4.3 million-barrel rise in stocks to 223.3 million last week was the culprit behind the drop. Supplies are robust thanks to low seasonal demand and a slight uptick in imports.
High energy inventories come at an opportune time. Skyrocketing demand from Asian and U.S. economies and tight world supplies have driven up prices over the past two years. Nearly 16% of the Gulf of Mexico's gas production and 24% of the region's oil output is still offline and much of it won't return to production until as early as mid-year.
That supply crunch is forcing many companies to look elsewhere, like in deeper waters, unconventional areas and overseas. But those areas require more time, technology and people to produce crude and natural gas. While the number of gas wells has tripled since 1971, production has dropped because many of those wells are maturing and not producing as much, according to the American Gas Association.
"To increase production, you're going to have to go to riskier areas," said Bruce Lanni, an energy analyst at AG Edwards in San Francisco.
Energy companies have advocated opening up some areas of the Gulf of Mexico currently closed to exploration to relieve some of the supply pressure. The Minerals Management Service, which oversees offshore leases, is proposing to lease the offshore areas off Virginia, Alaska and the Gulf of Mexico. The agency estimates there are 85.9 million barrels of oil and 419.9 trillion cubic feet of natural gas "technically recoverable" from those areas due to new drilling techniques. Those figures are 15% above the agency's previous 2001 estimates.