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By Bloomberg

Natural gas futures slumped below $3 per million British thermal units for the first time since 2012 on speculation that record production will overwhelm demand for the heating fuel.

Futures have slid 29 percent this year, heading for the first annual decline since 2011, as mild weather leaves stockpiles at a surplus to year-ago levels for the first time in two years. Temperatures may be mostly above average in the eastern half of the U.S. through Dec. 28, according to Commodity Weather Group LLC.

In the absence of extreme weather, rising production will leave inventories at an all-time high above 4 trillion cubic feet by the end of October 2015, BNP Paribas SA said in a report Dec. 23. U.S. gas production may climb 5.5 percent this year to a fourth consecutive record, government data show.

“This market continues to look oversupplied,” said Aaron Calder, senior market analyst at Gelber & Associates in Houston, said by phone on Dec. 24. “We are seeing support at $3 but I would say that once we break that I think $2.70 is probably our lower technical target.”

Natural gas for January delivery fell as much as 1.7 percent to $2.98 per million British thermal units on the New York Mercantile Exchange, the lowest since Sept. 26, 2012. The contract traded at $3.003 per million Btu as of 7:19 a.m. local time.

Gas stockpiles fell by 49 billion cubic feet to 3.246 trillion cubic feet in the seven days ended Dec. 19, falling below the five-year average withdrawal for the fourth straight week, according to the U.S. Energy Information Administration. Supplies were 150 billion, or 4.9 percent, higher than year- earlier levels. The surplus will “balloon to just shy of 200 billion cubic feet” by the start of next year, according to JPMorgan Chase & Co.

Generators Switch

Low gas prices are “eventually going to provide some sort of floor” by prompting power generators to switch from burning coal, said Calder. “This withdrawal shows that it’s going to be a while coming. In the meantime, we are going to see bears take over this market.”

BNP Paribas lowered its estimate for average 2015 gas prices to $3.60 per million Btu from $3.75.

“Unseasonably warm weather this month now necessitates extreme conditions ahead in order to avert a surplus,” Teri Viswanath, director of commodities strategy for the bank in New York, said in the report.

Output from the Marcellus shale formation in the Northeast may climb to 16.3 billion cubic feet a day in January, up 19 percent from a year earlier, the EIA said in its monthly Drilling Productivity Report on Dec. 8.

Warm Weather

The high in New York tomorrow may be 40 degrees Fahrenheit (4 Celsius), 11 more than usual, data from AccuWeather Inc. in State College, Pennsylvania, show. Chicago temperatures may slip to 28 degrees, 8 above normal.

An estimated 49 percent of U.S. households use gas for heating, led by the Midwest and Northeast, according to the EIA.

Hedge funds’ net-long wagers on U.S. natural gas fell 36 percent to 27,260 lots in the week ended Dec. 16, the lowest since October, Commodity Futures Trading Commission data show. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract.

“We’ve managed to get a significant amount of storage in place to be ready for any winter we may have,” said Santiago Diaz, energy trading associate at FCStone Latin America LLC in Miami by phone on Dec. 24. “It is bearish at the moment. Some people have been saying yes we might get some cold finally in January; it could have an effect on the market.”