UPDATE 3-Cool forecast lifts U.S. Oct natgas futures at expiry

Wed Sep 26, 2012 3:40pm EDT

* Short cover, cool outlook firm October futures at expiry
    * Nuclear plant outages also lend some price support
    * Mild near-term weather slows demand, limits upside
    * Coming up: EIA, Enerdata natgas storage reports Thursday

 (Recasts, adds trader quote, updates prices)
    By Joe Silha
    NEW YORK, Sept 26 (Reuters) - U.S. natural gas futures ended
higher on Wednesday for a second straight day, with technical
buying and forecasts for cooler weather next month lifting the
expiring October contract more than 3 percent.
    Extended forecasts show cooler weather slipping into the
Midwest and possibly the East in early or mid October. But with
storage and production still running at or near record highs,
many traders remained skeptical of the upside for prices despite
some book squaring or technical buying before October went off
the board.
    "I think the bottom is in for now. HDDs (heating degree
days) look like they pick up (turn colder) in October, and
traders are starting to focus ahead to (more demand in) winter,"
a New England-based trader said.
    Front-month October gas futures on the New York
Mercantile Exchange expired up 9.9 cents, or 3.4 percent, at
$3.023 per million British thermal units after trading between
$2.927 and $3.046. November settled 11 cents higher at $3.215.
    The front contract gained 6.6 percent in the last two days.
    Despite the run up, competition from low-priced coal may
turn out to limit the upside for gas prices.
    Some traders noted that if gas prices keep pushing above the
$3 mark, gas could become less competitive with coal in the
power generation market.
    Central Appalachian or eastern coal recently traded at a
2-1/2-year low at the gas price equivalent of just above $2.
    Concerns are growing that some utilities that have been
burning cheaper gas to generate power could switch back to coal.
Loss of that demand, which helped prop up gas prices all summer,
could force more gas into a well-supplied market.     
    Most analysts agree gas prices need to stay well below $3
this autumn to underpin switching demand.        
    While nuclear plant outages, running well above a year ago,
have boosted gas demand from electric utilities, traders noted
milder autumn temperatures have limited the impact by slowing
overall power loads. Gas-fired units are usually used to replace
any lost generation. 
    
    STORAGE SURPLUS SHRINKS, STOCKS STILL AT RECORD
    Utilities typically stockpile natural gas from April through
October to help meet peak winter heating demand.
    While record heat this summer helped trim a huge storage
surplus relative to last year by 64 percent from its late-March
high near 900 billion cubic feet, traders noted that weekly
storage builds were likely to pick up as weather loads fade.
    Traders and analysts polled by Reuters expect inventories to
have gained 76 bcf in Thursday's U.S. Energy Information
Administration storage report. 
    Stocks rose an adjusted 104 bcf during the same week last
year. The five-year average increase for that week is 76 bcf.   
    
    Total domestic gas inventories are still at record highs for
this time of year and likely to end the stock building season
above last year's all-time high of 3.852 trillion cubic feet.
    (Storage graphic: link.reuters.com/mup44s)     
    At 82 percent full, total stocks are hovering at levels not
normally reached until the second week of October and still
offer a huge cushion that can help offset any weather-related
spikes in demand or supply disruptions from storms.
    
    PRODUCTION STILL AT, NEAR RECORD HIGHS 
    Drilling for natural gas has been in a nearly steady decline
for the last 11 months, with the gas-directed rig count recently
posting a 13-year low. 
    But so far, production shows few, if any, signs of slowing.
    (Rig graphic: r.reuters.com/dyb62s )
    While dry gas drilling has become largely uneconomical at
current prices, gas produced from more profitable shale oil and
shale gas liquids wells has kept output stubbornly high.
    The EIA expects marketed gas production in 2012 to hit a
record for a second straight year, rising 4 percent from 2011
levels to 68.86 bcf per day.

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