Natural gas futures slide 5 percent after EIA stocks data

NEW YORK (Reuters) - Front-month U.S. natural gas futures reversed course and headed lower early Thursday after a government report showed a weekly inventory build slightly above market expectations.

The U.S. Energy Information Administration report showed total domestic gas inventories rose last week by 57 billion cubic feet to 3.063 trillion cubic feet.

The build came in above a Reuters poll estimate of 52 bcf but fell well short of last year's gain of 84 bcf and the five-year average increase for that week of 85 bcf.

"The net injection to U.S. natural gas storage was more than the consensus expectation and suggests a slight weakening in the market's underlying supply-demand balance," Tim Evans, an analyst at Citi Futures Perspective, said in a report.

At 11:50 a.m. EDT (1550 GMT), front-month August gas futures on the New York Mercantile Exchange were down 9 cents, or 3.2 percent, at $2.708 per million British thermal units after sinking to an intraday low of $2.659 right after the EIA report.

Just prior to release of the weekly storage data at 10:30 a.m., the front month was trading in the $2.81 area.

The previous front contract, July, on Wednesday climbed to a 5-1/2-month high of $2.946 before expiring at $2.774, up 0.7 cent.

Front-month futures had shot up more than 10 percent in the previous five sessions as a widespread heat wave blanketed most of the country. A warm June signaled an early start to the summer cooling season and helped drive prices up sharply from mid-month lows in the $2.15 to 2.20 area.

MDA EarthSat scaled back slightly its temperature outlook for the next two weeks but noted there was still plenty of heat in the forecast, primarily aimed at the Midwest.

The private forecaster also said it expects heat to linger through July, making it one of the top five warmest based on population weighted cooling degree days dating back to 1950.

Strong utility demand for gas has slowed inventory builds to below average for nine straight weeks and helped pull the surplus to last year down 26 percent from late-March highs.

But many traders remain skeptical of the recent move up, noting stocks are still at record highs for this time and remain well above last year and the five-year average.

Some also caution that as gas prices approach the $3 mark, utilities could start using more coal to generate power. They noted the NYMEX eastern coal to Henry Hub gas spread on Wednesday hit its narrowest in nearly a year, dipping below $1.10 per mmBtu (gas premium).

The spread does not include transport costs.

Chart traders said that Wednesday's front month run up above the 200-day moving average for the first time in 11 months was supportive, but most agreed the market was overbought and due for a pullback after recent gains.

ANOTHER BELOW-AVERAGE BUILD

Lagging storage builds this season have raised expectations that record-high storage can be trimmed to more manageable levels in the 20 weeks left before winter withdrawals begin.

The weekly injection trimmed the surplus to last year by 27 bcf to 653 bcf, or 27 percent above the same week in 2011. It also sliced 28 bcf from the excess versus the five-year average, reducing the total to 613 bcf, or 25 percent.

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

Total storage is already 75 percent full and hovering at a level not normally reached until late August. Producing-region stocks are at 84 percent of estimated capacity.

Concerns remain that the storage overhang could still drive prices to new lows this summer as storage caverns fill.

The storage surplus to last year will have to be cut by at least another 405 bcf to avoid breaching the government's 4.1-tcf estimate of total capacity. Stocks peaked last year in November at a record 3.852 tcf. The EIA expects gas storage to climb to a record 4.015 tcf by the end of October.

Early injection estimates for next week's EIA report range from 39 bcf to 55 bcf versus last year's build of 90 bcf and the five-year average increase for the week of 79 bcf.

DEMAND UP, PRODUCTION GROWTH SLOWS

Gas demand picked up sharply this year as spring prices hit 10-year lows at $1.90 and prompted many utilities to use more gas-fired generators to produce power. But gas production is still flowing at near-record-high levels despite relatively low prices that have made many dry gas wells uneconomical.

Traders were waiting for EIA's April gross gas production report due out on Friday after output in March fell for a second straight month.

Baker Hughes drilling rig data was also expected on Friday after last week's data showed the gas-directed rig count fell to 541, its eighth drop in nine weeks and the lowest since August 1999.

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

A 42 percent drop in dry gas drilling in the last eight months has fed perceptions that producers are getting serious about stemming the flood of record gas supplies.

Dry gas drilling has become largely uneconomical at current prices, but drillers have been moving rigs to more profitable shale oil and shale gas liquid plays that still produce plenty of associated gas that ends up in the market after processing. That has slowed the overall drop in dry gas output.

(Reporting By Joe Silha; editing by M.D. Golan)