UPDATE 3-US natgas futures end higher despite swelling inventories

Thu Aug 30, 2012 3:40pm EDT

Related Topics

* Front month slips, then climbs after bearish EIA report
    * Warm Northeast, Midwest weather forecasts prop up prices
    * Bearish technicals limit upside
    * Coming Up: EIA gas production data, Baker Hughes rigs Fri.

 (Releads, adds analyst quote, updates with closing prices)
    By Joe Silha
    NEW YORK, Aug 30 (Reuters) - Front-month U.S. natural gas
futures ended higher on Thursday for a second day, as forecasts
for warm weather that should boost air conditioning demand
outweighed government data showing a substantial rise in
domestic gas inventories last week.
    The U.S. Energy Information Administration report showed
total domestic gas inventories rose last week by 66 billion
cubic feet to 3.374 trillion cubic feet. 
    The build came in above the Reuters poll estimate of 61 bcf
and also above last year's gain and the five-year average
increase for that week.  It was the first time in 18 weeks that
the stock build exceeded the seasonal norm.
    Front-month gas futures on the New York Mercantile
Exchange ended up 6.3 cents, or 2.3 percent, at $2.748 per mmBtu
after sliding to an intraday low of $2.637, then climbing to an
intraday high of $2.767 after the EIA report.
    "We moved up today because the market was eyeing next week's
(EIA) number which could come in at about half of the five-year
average," said Eric Bickel, analyst at Summit Energy.
    "There's been a whole lot of heat this week that is keeping
power generation demand elevated, and we've got supply cuts from
the storm," Bickel added.
    While temperatures have moderated somewhat from the record
heat in July, traders said lingering warmth was expected for the
next five days or so in the Midwest and Northeast, key gas
consuming regions, which should stir demand for electricity.
    But private forecaster MDA EarthSat expects readings for
most of the eastern half of the nation to moderate to normal or
slightly below by late next week.
    Isaac plowed into the Louisiana coast as a Category 1
hurricane late Tuesday, knocking out power to nearly a million
homes and businesses.
    Almost 75 percent of daily offshore Gulf gas production, or
3.3 bcf, was shut in by Isaac on Thursday. A total of 12 bcf of
output has been cut over the last six days, and analysts now
expect that total to climb to more than 15 bcf by the time
production returns to normal late this week or early next week.
   
    
    
    Technical traders said the chart picture turned bearish this
week after front-month futures closed below some key support
points in the $2.70 area. Most pegged the two-day run up to
short covering after prices got oversold.   
    Many traders remain skeptical of any upside, noting that
peak summer heat is likely to fade in the next couple of weeks
and storage and production are still at or near record highs.   
    
    ABOVE AVERAGE STORAGE BUILD
    Some record heat this summer has stirred strong demand for
gas and helped slow storage builds, but weekly injections are
expected to pick up as summer heat fades.
    The weekly build increased the surplus to last year by 6 bcf
to 429 bcf, or 15 percent above the same week in 2011. It also
added 4 bcf to the excess versus the five-year average, boosting
that surplus to 361 bcf, or 12 percent.     
    (Storage graphic: link.reuters.com/mup44s) 
    While a huge inventory surplus, which peaked in late March
at nearly 900 billion cubic feet above year-ago, has been cut in
half, storage remains at record highs for this time of year.
    At 82 percent full, stocks are at levels not normally
reached until late September and offer a huge cushion that can
help offset any weather-related spikes in demand or Gulf Coast
supply disruptions from storms.
    There are still concerns that the storage overhang could
drive prices to new lows later this summer if stocks climb to
levels that test the government's 4.1-tcf estimate of capacity.
    Early injection estimates for next week's EIA report range
from 43 bcf to 59 bcf versus a year-earlier build of 62 bcf and
the five-year average increase for the week of 60 bcf.          
    Some traders say that if prices again try to push above $3,
some utilities that have been using relatively cheap gas for
power generation could move back to coal. That would slow
overall gas use and likely lead to bigger weekly stock builds.

    PRODUCTION HIGH DESPITE RIG DECLINES        
    Traders were waiting for the next Baker Hughes drilling rig
report on Friday. While the gas-directed rig count has fallen in
12 of the last 14 weeks to a 13-year low, traders note there is
little evidence so far that record gas output is slowing.
    (Rig graphic: r.reuters.com/dyb62s )
    Dry gas drilling may be largely uneconomical at current
prices, but the associated gas produced from more profitable
shale oil and shale gas liquids wells is likely to keep gas
production at a record high for a second straight year.
    On Friday, EIA will release its monthly gross natural gas
production report for June. May output was unchanged from April
and hovering just below January's 72.74 bcfd record high.

 (Additional reporting by Eileen Houlihan; Editing by David
Gregorio)
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