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

Futures settled at the lowest in 27 months and have plunged 26 percent in December, heading for the biggest one-month drop since July 2008, as mild weather and record production erased a surplus to year-ago levels for the first time in two years.

Natural gas for January delivery fell 2.3 cents, or 0.8 percent, to settle at $3 per million Btu on the New York Mercantile Exchange. Futures touched $2.97, the lowest intraday price since Sept. 26, 2012. Volume was 54 percent below the 100-day average for the time of day at 2:32 p.m. Gas dropped 13 percent this week, a fifth straight weekly decline.

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

Absent extreme weather, rising production will leave inventories at an all-time high above four trillion cubic feet by the end of October 2015, BNP Paribas SA said in a report Tuesday. Production of the heating and power plant fuel expanded in 2014 to an all-time high for the fourth consecutive year, rising 5.5 percent to 74.26 billion cubic feet a day, EIA data show. Daily output will rise an additional 3.1 percent next year to 76.58 billion, marking a decade of gains as technologies such as hydraulic fracturing, or fracking, made it more economic to extract fuel from shale rock.

The Marcellus formation in the East has emerged as the biggest driver of gas production growth in the United States. Production from the shale formation may average 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.

"This market continues to look oversupplied," Aaron Calder, senior market analyst at Gelber & Associates in Houston, said Wednesday.