By David Bird and Christian Berthelsen Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Natural gas prices dropped nearly 2% Friday, continuing a months-long slide brought on by abundant supply and tepid weather-suppressed demand, and exacerbated by low holiday trading volume. Natural gas futures have been beaten down to 27-month lows recently. Many analysts see the market remaining depressed for the foreseeable future, with prices possibly falling even further, below the $3 a MMBtu mark. The natural gas futures contract for January delivery sank to $3.096 a million British thermal units Monday on the New York Mercantile Exchange. That was the lowest level for prices since Sept. 4, 2009. Prices rose marginally over the next three sessions before closing down 5.5 cents, or 1.7%, to $3.114 a MMBtu on the New York Mercantile Exchange Friday. "It looks like it went out with a belly flop," said Tom Saal, senior vice president of energy trading at INTL Hencorp Futures in Miami. "Winter hasn't shown up yet, and until it does the market's going to continue to erode, price-wise." The rut has been an anomaly in what is normally the peak demand season that accompanies winter weather, as people rely on natural gas to heat their homes. More than half of U.S. homes use natural gas for heating, according to the U.S. Energy Information Administration, and power companies often use natural gas to generate electricity, which is also used for heating. Warmer-than-normal U.S. temperatures since the onset of autumn have curtailed demand and undercut prices. This has been compounded by robust natural gas output from newly tapped U.S. shale-gas fields. The result: Inventories of natural gas that companies have on hand have swelled to 11.9% more than the five-year average for this time of year, according to the EIA, part of the U.S. Energy Department. The weather and supply situation have steadily chipped away at prices, which have fallen 35.2% since their high in June. Analysts don't see either cooler weather or declining inventories on the horizon. Short-term weather outlooks issued by the U.S. government Thursday, the official start of winter, show temperatures far from seasonal. In the Dec. 28 to Jan. 5 forecast from the Climate Prediction Center, above-normal temperatures extend across the northern half of the nation. Weather is projected to be so warm for so long that forecasters are struggling to characterize the situation. WSI Energycast Friday described the situation as "above, much-above, and even super-above normal temperatures" for most of the country in the coming days, including as much as 18 degrees above normal in the north-central U.S. Natural gas prices are expected to fall even further without colder temperatures to prompt customers to turn up their thermostats, draining some of the vast natural gas inventories. If the warm weather "continues into the first three weeks of next month, we could start hearing bells and get ready for a test" of near $2.50, said Gene McGillian, a broker and analyst at Tradition Energy in Stamford, Conn. Natural gas futures haven't pierced that level since March 2002. Barclays Capital said Friday's market performance left natural gas sagging into the holiday weekend. "With Central Appalachian coal trading for 2012 at about $70 a ton and gas near the $3 mark, many traders would rather have a lump of coal in their stockings," the firm said. -By David Bird and Christian Berthelsen, Dow Jones Newswires; 212-416-2141 and 212-416-2381; david.bird@dowjones.com and christian.berthelsen@dowjones.com

Source