UPDATE 1-US natural gas futures end down 3 pct ahead of holiday

Mon Dec 24, 2012 2:19pm EST

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* Futures slip on winter weather worries
    * Near-record-high storage, production also weigh on prices
    * Above-average nuclear plant outages help limit downside

 (Adds byline, trader quote, background, updates prices)
    By Joe Silha
    NEW YORK, Dec 24 (Reuters) - Front-month U.S. natural gas
futures ended lower on Monday in a holiday-shortened session,
pressured by near record-high supplies and concerns that winter
will not turn out cold enough to whittle down the huge amount of
gas in inventory.
    Traders said activity was very light ahead of the Christmas
holiday on Tuesday. New York Mercantile Exchange floor trading
closed early on Monday at 1:30 p.m. EST (1830 GMT) and will
remain closed on Tuesday for Christmas.    
    "Parts of the country like the Midwest have been cold, but
it hasn't been enough. The market is waiting for direction from
the weather," a Texas-based trader said.
    Front-month January natural gas futures on the New
York Mercantile Exchange, which expire on Thursday, ended down
10.5 cents, or 3 percent, at $3.346 per million British thermal
units after trading between $3.342 and $3.461.
    The front contract hit a 13-month high of $3.933 late last
month and a 2-1/2-month low of $3.261 just 10 days ago.
    Without some sustained cold to boost heating loads, most
traders agree it will be difficult for gas prices to move higher
with inventories still at record highs for this time of year and
production flowing at or near an all-time peak.
    Traders also noted that demand typically slows during the
Christmas and New Year holiday weeks regardless of weather
because many schools and businesses are closed.
    Commodity Weather Group still expects a cold pattern to
continue for most of the United States for the next two weeks,
but many traders remained skeptical about 10-day and 15-day
forecasts, noting computer projections that far out have not
been reliable, often flipping from warm to cold and back again.
    If the weather stays cold, traders said gas prices could
garner support from nuclear plant outages, which are still
running at about 11,600 megawatts this week, or nearly 5,000 MW
above average for this time of year. Gas-fired plants are
typically used to replace any lost nuclear generation.
    
    GAS DRILLING GAINS, OUTPUT STILL NEAR RECORD
    Drilling for natural gas has mostly been in decline for more
than a year, with gas rigs down 54 percent since peaking at 936 
in October 2011. 
    The Baker Hughes gas rig count at 429 is hovering just above
the 13-1/2-year low of 413 posted just six weeks ago, but so far
production has not shown any significant sign of slowing. 
    (Rig graphic: r.reuters.com/dyb62s)
    The U.S. Energy Information Administration recently said it
expected gas output in 2013 to rise to a record high of 69.59
billion cubic feet per day, the third straight annual record.
    
    INVENTORIES DROP MORE THAN EXPECTED 
    EIA data last week showed gas inventories for the week ended
Dec. 14 fell by 82 bcf, but at 3.724 trillion cubic feet, total
stocks were still at record highs for this time of year.
    Storage is still hovering at 66 bcf, or nearly 2 percent,
above the same year-ago week and 345 bcf, or 10 percent, above
the five-year average.
    (Storage graphic: link.reuters.com/mup44s ) 
    The storage surpluses are expected to widen further in
Friday's report, with early withdrawal estimates ranging from 66
bcf to 84 bcf. That would be short of the 87 bcf pulled from
inventory during the same week last year, while the five-year
average decline for that week is 140 bcf. 
    The EIA report will be delayed one day due to the holiday.

 (Reporting By Joe Silha; Editing by Maureen Bavdek and Sofina
Mirza-Reid)
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