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By Bloomberg

Natural gas declined to the lowest in 16 months as mild weather and rising production left inventories above year-earlier levels for the first time since 2012.

Futures fell as much as 5.7 percent to the lowest since Aug. 13, 2013, making the fuel the worst performer among 22 raw materials in the Bloomberg Commodity Index. U.S. temperatures were forecast to warm over the weekend and to be above normal in the early part of this week, forecaster MDA Weather Services in Gaithersburg, Maryland, said in e-mailed report Dec. 19.

Gas in storage sites in the week ended Dec. 12 were 3.295 trillion cubic feet, 47 billion more than a year earlier, government data showed. While Morgan Stanley says the surplus will widen to more than 150 billion by the end of the month, JPMorgan Chase & Co. says inventory surplus will “balloon to just shy of 200 billion cubic feet” by the start of 2015.

“Supply growth and mild weather returned working gas storage to a year-on-year surplus for the first time since December 2012,” Morgan Stanley analysts including New York- based Adam Longson said in a report e-mailed today. That “adds to near-term downside risk.”

Natural gas for next month fell to as low as $3.266 per million British thermal units on the New York Mercantile Exchange before trading at $3.278 per million Btu by 5:38 a.m. in New York. The volume of all futures traded was more than triple the 100-day average for the time of day.

Prices have fallen 23 percent this year, heading for the biggest annual loss since 2011. While “headwinds” are set to persist though the end of the year, prices have the potential to rebound early 2015 as early weather forecasts point to the likelihood of colder weather, according to Morgan Stanley.

‘Upside Swings’

“With managed money net positioning near two-year lows, the potential for cold weather to produce upside swings and volatility also increases,” Longson said.

Colder changes to the weather forecasts in January mean gas inventories at the end of the season will be at 1.65 trillion cubic feet, JPMorgan analysts Scott Speaker and Shikha Chaturvedi said in a Dec. 18 report e-mailed today.

An estimated 49 percent of U.S. households use gas for heating, according to the Energy Information Administration, the Energy Department’s statistical arm.