UPDATE 3-US gas futures end down 4 pct, rebound from 3-mth low

Wed Jan 2, 2013 2:54pm EST

* Front month sinks overnight to lowest mark since Sept.
    * Long-term weather outlooks trending milder
    * Coming up: API oil data Thursday, EIA oil, gas data Friday

 (Updates prices to settlement, recasts)
    By Eileen Houlihan
    NEW YORK, Jan 2 (Reuters) - U.S. natural gas futures slid
n early 4 p ercent on Wednesday, but rebounded from a steep drop
in overnight electronic trade that brought the front-month
contract to its lowest mark in over three months.
    Traders attributed the big trading drop of more than 30
cents, or 9 percent, to an algorithmic, or electronic
computer-driven, trade.
    But most expect little upside to prices, with long-term
weather outlooks still calling for above-normal temperatures for
much of the nation, curbing heating needs and lessening demand
for gas in winter storage.
    "Overnight natural gas futures cratered slightly more than
30 cents in what was in all likelihood a 'fat finger' error. The
prompt contract rebounded in heavy volume as traders weighed the
next couple months of winter heating needs against the record
storage levels that overhang the market," said Addison Armstrong
senior director of market research for Tradition Energy.
    "Weather and a little more weather is what is driving
natural gas prices and will continue to do so as we are now in
the heart of the winter heating season. Unfortunately for the
remaining bulls, the current weather forecast is bearish," added
Energy Management Institute's Dominick Chirichella. 
    Front-month February natural gas futures on the New York
Mercantile Exchange s lid 11.8 cents, or 3.52 percent, to
settle at $3 .23 3 p er million British thermal units.
    The contract fell as low as $3.05 overnight, the lowest mark
for a spot contract since late September.
    Other months ended lower as well, with the March contract
 falling 11 cents, or more than 3 percent, to $3.255 and
summer months losing about 10 cents each. 
    In the cash market, gas for Thursday delivery at the NYMEX
benchmark Henry Hub NG-W-HH in Louisiana lost 13 cents to
average $3.30, but late deals firmed to 4 cents over the
front-month contract, from a 1-cent premium early Monday.
    Floor trading on NYMEX and cash did not trade on Tuesday,
the New Year's Day holiday.
    Gas on the Transco pipeline at the New York citygate
NG-NYCZ6 l ost more than $ 7 o n average to the $ 10 ar ea. 
    The latest National Weather Service six-to-10-day forecast
issued on Tuesday called for above-normal temperatures for a
little more than the eastern half of the nation, with
below-normal readings in the West.
    Nuclear outages totaled just 8,500 megawatts, or 8 percent
of U.S. capacity, up from 6,400 MW out a year ago and a
five-year average outage rate of about 5,000 MW. 
    
    WINTER STORAGE STILL BLOATED
    Last week's Energy Information Agency (EIA) gas storage
report showed total domestic inventories fell 72 billion cubic
feet to 3.652 trillion cubic feet, below market expectations for
a 76 bcf draw. 
    Inventories started the heating season in early November at
an all-time high of 3.929 tcf and are still at record highs for
this time of year, hovering at more than 2 percent above last
year and 13 percent above the five-year average.
    (Storage graphic: link.reuters.com/mut84t)
    Early withdrawal estimates for this week's report ranged
widely from 68 bcf to 165 bcf, with most expecting a draw above
100 bcf. Stocks fell 77 bcf during the same year-ago week, and
have dropped about 111 bcf on average that week over the past
five years.
    The EIA report will be delayed by one day this week to
Friday due to the New Year's holiday.
    
    RIGS GAIN, OUTPUT STILL NEAR RECORD
    Baker Hughes data on Friday showed the gas-directed rig
count rose by two last week to 431, its second straight weekly
gain. 
    But drilling for natural gas has mostly declined for more
than a year, with gas rigs down 54 percent since peaking at 936
in October 2011.
    (Rig graphic: r.reuters.com/dyb62s)
    The gas rig count is hovering just above a 13-1/2-year low
of 413 hit seven weeks ago, but so far production has not shown
any significant sign of slowing. 
    The EIA expects gas output in 2013 to rise to a record high
of 69.59 bcf per day, the third straight annual record.

 (Editing by Nick Zieminski, Jeffrey Benkoe, Gunna Dickson and
Marguerita Choy)
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