US spot natgas prices slip as heat wave eases

* Henry Hub cash slips after Friday's six-month high
* Mild early-week temperatures slow demand
* Warmer late-week forecasts seen limiting downside

By Joe Silha
NEW YORK, July 9 (Reuters) - U.S. spot natural gas prices
were mostly lower on Monday for the first time in four sessions
as a heat wave eased across much of the nation and slowed air
conditioning demand.
But traders said the downside seemed limited by expectations
for a very light weekly inventory build on Thursday and by
prospects that demand will pick up later this week and next week
when the weather heats up again.
"Loads (demand) are pulling back this week, but some
forecasters are putting the heat back next week," said Steve
Platt, analyst at Archer Financial in Chicago.
Gas for Tuesday delivery at Henry Hub NG-W-HH, a key
supply point in Louisiana, lost 15 cents to $2.79 per million
British thermal units after hitting a six-month high of $2.94 on
Friday. Late Hub deals were done at about a 1-cent discount to
NYMEX futures.
The daily Hub average is just above the July monthly index
of $2.77 but well below the year-ago price of $4.19 and the
$4.36 mean on about the same day in 2010.
In major consumer markets, day-ahead prices on Transco
pipeline at the New York City gate NG-NYCZ6 dropped 20 cents
to $2.97 on the milder Tuesday outlook. Chicago NG-CHGC was 6
cents lower at $2.91.
While milder Northeast and Midwest weather this week should
slow demand after last week's record heat, traders said the
forecasts for warmer weather late this week and early next week
helped restrain the sell-off.
The supply and demand balance for gas has tightened this
year amid signs that record production was finally slowing while
demand was picking up as more electric utilities switched from
coal to cheaper gas to generate power.
But some traders cautioned that prices have been flirting
with levels that could slow or even reverse utility fuel
switching, a big factor in boosting gas demand this year.

PRODUCTION, STILL HIGH
While gross U.S. gas production has slowed some from
January's record highs, output is still flowing at near all-time
peaks despite declines in dry gas drilling and planned output
cuts by several key producers.
Data from Baker Hughes on Friday showed the gas-directed rig
count rose last week by 8 to 542 after hitting a 13-year low the
prior week. It was the first rise in 7 weeks.
(Rig graphic: r.reuters.com/dyb62s )
A 42 percent drop in dry gas drilling in the last eight
months has stirred expectations that record high output was
finally poised to slow.
The problem is that horizontal rigs, the type most often
used to extract oil or gas from shale, are still hovering just
shy of the record high 1,193 hit in May.
Drillers continue to move rigs away from dry gas plays to
more profitable shale oil and shale gas liquid plays, but those
wells still produce plenty of associated dry gas that ends up in
the market after processing.
That has slowed the overall drop in dry gas output.

LAGGING STORAGE BUILDS
Data from the U.S. Energy Information Administration last
week showed that total domestic gas inventories for the week
ended June 29 fell by 39 billion cubic feet to 3.102 trillion
cubic feet. The lower-than-expected gain was viewed as bullish.
Weekly storage builds have fallen below the seasonal norm
for 10 straight weeks and helped pull the surplus to last year -
now at about 602 bcf - down by a third from late-March highs.
That trend has raised expectations that record-high
inventories can be trimmed to more manageable levels in the 19
weeks left before winter withdrawals begin.
Traders expect the inventory surplus to last year and the
five-year average to shrink sharply again in Thursday's report,
with early injection estimates ranging from 19 to 29 bcf versus
last year's adjusted build of 87 bcf and the five-year average
increase for that week of 90 bcf.
(Storage graphic: link.reuters.com/mup44s)
Total storage is still at record high for this time of year
and stands at about 76 percent full, a level not normally
reached until early September. Producing-region stocks are at 84
percent of estimated capacity.
The storage surplus to last year will have to be cut by at
least another 355 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.
Concerns remain that the storage overhang could still drive
prices to new lows later this summer as storage caverns fill.
In late New York Mercantile Exchange trade, front-month gas
futures were up 8 cents, or 2.9 percent, at $2.856 per
mmBtu, backed by technical buying and short covering after
Friday's 6 percent slide and warmer extended forecasts.
Average prices at other spot gas market points and previous
day prices follow (US$/mmBtu):
07/09/12 07/06/12
Henry Hub 2.79 2.94
New York city gate 2.97 3.17
Chicago city gate 2.91 2.97
Panhandle (Mid-continent) 2.69 2.75
Northern at Demarcation (Minn.) 2.85 2.88
Southern California Border 2.93 2.95
Katy Hub (East Texas) 2.77 2.90
Waha (West Texas) 2.76 2.88
Dominion-South (Appalachia region) 2.80 2.96
Columbia TCO (Appalachia region) 2.82 2.97

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(Reporting By Joe Silha; Editing by Bob Burgdorfer)