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By Bloomberg

Natural gas prices pressured by record U.S. production are poised to repeat last winter's rally as forecasts for another frigid season raise the specter of supply constraints.

AccuWeather Inc. and Commodity Weather Group LLC predict below-normal temperatures for much of the U.S. this winter. The price difference between gas for delivery in October and January is the narrowest for this time of year since 2000, a sign that the market views stockpiles as ample to meet peak heating demand.

Goldman Sachs Group Inc. cut its forecast for average gas prices in the fourth quarter of this year and throughout 2015 to $4 per million British thermal units from $4.25, citing a mild summer and rising production. Last winter, a polar vortex left gas supply at an 11-year low and sent futures to a five-year high. Gas inventories will enter the heating season at the lowest level for the time of year since 2008, the U.S. Energy Information Administration predicts.

"Even a normal winter will chew through a lot of the inventory we've built up," John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said yesterday in a phone interview. "The gas market is still vulnerable to price spikes."

Falling Prices

Natural gas for October delivery on the New York Mercantile Exchange has dropped 40 percent since reaching a five-year high of $6.493 per million Btu on Feb. 24 and traded little changed today at $3.896. October gas traded 21.6 cents below the January contract yesterday. Analysts' forecasts for first-quarter futures this time last year were about 12 percent below the eventual price.

Gas for next-day delivery at Henry Hub in Erath, Louisiana, the benchmark for Nymex futures, traded at $3.9648 per million Btu yesterday, 2.5 percent below the average of futures for delivery in November through March.

The narrow spot gas to winter spread "suggests complacency in the market about winter supplies," Michael Hsueh, an analyst at Deutsche Bank AG in London, said in an Aug. 29 phone interview. "The spread and the supply deficit could be a good set-up for higher prices, given a cold winter."

Hsueh predicts gas will average $5 per million Btu in the first quarter, the highest among the 10 most recent estimates compiled by Bloomberg.

Shale Production

Analysts including Goldman's Daniel Quigley in London say supply growth from the Marcellus and Utica shale reservoirs in Appalachia will limit price gains. Output from the region has climbed more than 13-fold since 2007 to make up about 18 percent of the U.S. total, EIA data show.

Marcellus production will advance 1.4 percent from September to 16.1 billion cubic feet a day in October, the EIA said Sept. 8. Utica may rise 5.6 percent to 1.5 billion.

"Strong U.S. gas production growth will now drive a bearish trend" in prices, Quigley said in a Sept. 12 note to clients.

Barclays Plc cut its estimate for 2014 gas to $4.30 from $4.55, while Citigroup Inc. lowered its forecast to $4.70 from $4.90.

Analysts discounting the possibility of a winter rally may be in for a surprise if frigid weather descends, according to Greg Armstrong, chairman and chief executive officer of Plains All American Pipeline LP, a Houston-based company that owns gas storage reservoirs in Louisiana, Michigan and Mississippi.

Not 'Pretty'

"If we have a winter this year like we had last year, I would say it's not going to be pretty at all, and everybody's going to be upset," Armstrong said during an Aug. 7 earnings call. "We're still just not filling storage up fast enough in the Gulf Coast."

Gas inventories totaled 2.891 trillion cubic feet as of Sept. 12, 12 percent below the same period last year. Supplies were 13 percent less than the five-year average, the biggest deficit for the week in government reports going back to 2005. Inventories in the so-called producing region, or Gulf Coast, reached 866 billion, down 21 percent from a year ago.

"The market seems comfortable with inventories, which are getting an added cushion from production growth," Christopher Louney, an analyst at Barclays in New York, said yesterday in a phone interview. "You can't say that winter price spikes are out of the question, but they would be temporary."

Frigid Air

Last year's polar vortex, or rotation of frigid air in the Arctic Circle, dipped southward into the U.S., resulting in the coldest January through April for the eastern U.S. since 1993, according to the National Climatic Data center in Asheville, North Carolina. Gas for next-day delivery in the Northeast, including the Tetco-M3 hub serving New York, surged to a record as a dearth of pipelines prevented Marcellus and Utica gas from reaching demand centers.

"We could see crazy prices like what we saw last winter," Moses Rahnama, an analyst at Energy Aspects Ltd. in London, said in an Aug. 15 phone interview. "Imports from Canada would have to ramp up to meet demand in the Northeast."

Below-normal temperatures may prevail across the Midwest and East Coast this winter, Commodity Weather Group said in a Sept. 9 outlook.

AccuWeather predicted colder-than-average weather in parts of the mid-Atlantic, the South and the Great Lakes regions. About 49 percent of U.S. households use gas for heating, with the biggest share in the Midwest, EIA data show.

U.S. gas demand is climbing amid increased consumption from industrial users and rising exports to Mexico. Shipments to Mexico via pipeline from the U.S. totaled 65 billion cubic feet in June, up 13 percent from a year earlier. Consumption may advance 1.8 percent this year to 72.6 billion cubic feet a day, according to the EIA.

"The gas market is susceptible to price shocks if we see another severe winter," Tim Rezvan, an analyst at New York- based brokerage Sterne Agee, said in an Aug. 22 phone interview. "We are running out of weeks for above-trend gas injections to create a glut of gas in storage."