Natural gas ends down 2 percent, stays near 10-year low

NEW YORK Mon Mar 12, 2012 3:53pm EDT

NEW YORK (Reuters) - Natural gas futures slid just over 2 percent on Monday, managing to remain above a recent 10-year low despite weaker crude, mild late-winter weather and swollen inventories.

"With less than two weeks to the start of spring and with the weather conditions already spring-like in many parts of the country, the probability that total natural gas in inventory will end at an all-time record high level is increasing by the week," said Energy Management Institute's Dominick Chirichella.

"With little to support any modest short covering rally and with the inventory surplus still growing, we may in fact see futures prices trading with a $1 handle earlier than I thought we would... over the next week or even before we enter the shoulder season," Chirichella added, a sentiment echoed by others.

Front-month April natural gas futures on the New York Mercantile Exchange slid 5.5 cents, or more than 2 percent, to finish at $2.269 per million British thermal units.

The contract slid as low as $2.235, matching a contract low and just above the January low of $2.231, the lowest price for a front month since March 2002.

Other months ended down as well, with the May contract sliding 5.2 cents, or also more than 2 percent, to $2.373, and summer months losing about 5 cents each.

In the cash market, gas bound for the NYMEX delivery point Henry Hub in Louisiana slid 4 cents to $2.17, its lowest mark since September 2009.

Early Hub cash deals were done at about a 12-cent discount to the front month, easing from deals done late Friday at about a 10-cent discount.

Gas on the Transco pipeline at the New York City gate fell 7 cents to $2.29, also its lowest price since September 2009, while Chicago gas gas was 4 cents lower on the day at $2.20.

Temperatures in both key gas-consuming cities were seen climbing to the low to mid-70s Fahrenheit by midweek, according to the Weather Channel's weather.com.

STORAGE A PROBLEM FOR PRICES

Last week's gas storage report from the U.S. Energy Information Administration showed total domestic inventories fell to 2.433 trillion cubic feet, still at record highs for this time of year, and more than 700 bcf, or 40 percent, above both last year and the five-year average level.

(Storage graphic: link.reuters.com/mup44s)

Early withdrawal estimates for this week's EIA report range from 47 bcf to 66 bcf versus last year's drop of 60 bcf and the five-year average decline of 79 bcf for that week.

With no extreme cold on the horizon, stocks are likely to end winter at an all-time high of 2.2 tcf, well above the previous record of 2.148 tcf set in 1983.

The cushion could also spell trouble for prices late in the summer stock-building season if storage caverns fill to capacity and force more supply into the market.

OUTAGES, CUTS COULD HELP TIGHTEN MARKET

Nuclear plant outages were running at about 19,600 megawatts, or 20 percent, on Monday, up from 14,500 MW out a year ago and a five-year outage rate of about 14,700 MW.

Traders said the outages could add more than 1 bcf to daily gas demand.

And planned output cuts by producers could trim 1 bcf per day or more from flowing supply.

Relatively cheap gas has also drawn more industrial use and prompted additional utility fuel switching away from more expensive coal.

But with production still running at or near all-time highs, few traders expect much upside in prices in the near term.

MORE FUNDAMENTALS

The National Weather Service six to 10-day outlook issued on Sunday called for above or much-above-normal readings for about the eastern two-thirds of the nation and below-normal readings only in the West.

Baker Hughes drilling data last week showed the gas-directed rig count fell for a ninth straight week to a 32-month low of 670.

The steady drop in gas-directed drilling has stirred talk that low prices might finally slow output.

(Rig graphic: r.reuters.com/dyb62s)

Analysts agree it can take months for a slowdown in drilling to translate into lower production, noting the producer shift in spending to higher-value oil and gas liquids plays still produces plenty of associated gas that partly offsets any reductions in dry gas output.

A recent Bernstein report said the gas-directed rig count would have to drop to about 600 before it would be comfortable forecasting flat to falling production.

Most analysts, noting it will be difficult to balance the gas market without serious production cuts, do not expect any major slowdown in gas output until late this year.

(Reporting by Eileen Houlihan; editing by John Picinich)

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