UPDATE 3-US natgas futures end down; weather, EIA data weigh

Mon Jan 7, 2013 4:15pm EST

* Colder midmonth outlook could limit downside.
    * High storage, production continue to weigh on sentiment
    * Coming up: EIA short-term energy outlook on Tuesday


    By Joe Silha
    NEW YORK, Jan 7 (Reuters) - U.S. natural gas futures ended
lower on Monday after some early buying, pressured by fairly
mild near-term weather forecasts and government data showing gas
production in October hit a record high for a second straight
month.
    With inventories still at record highs for this time of
year, many traders expect prices to remain on the defensive
until another cold shot arrives to stir more heating demand.
    "Early on we saw specs (speculative traders) unwinding short
positions which gave the market some support, but prices fell in
response to the production report issued by the EIA which showed
October output at a new record," said Gelber & Associates
analyst Aaron Calder.
    Calder also noted that bullish traders were hampered by
Monday's 11- to 15-day weather forecast which did not look as
supportive as it did on Friday.
    After a chilly week last week, MDA Weather Services expects
temperatures for the eastern half of the United States to
average above normal for the next 10 days.
    While the private forecaster does see colder readings for
most of the nation by midmonth, many traders remain skeptical
about 15-day forecasts, noting computer projections that far out
have not been reliable, often flipping from warm to cold and
back again.
    Front-month gas futures on the New York Mercantile
Exchange ended down 2.1 cents at $3.266 per million British
thermal units after trading between $3.238 and $3.352. The front
contract, which hit a three-month low of $3.05 on Wednesday,
lost 5.2 percent last week on the milder forecast for this week.
    Traders said gas prices could pick up support from nuclear
plant outages, which are running at nearly 9,000 megawatts this
week, or 3,700 MW above average for this time of year.
    Gas-fired plants are typically used to offset any lost
nuclear generation, but traders said the milder temperatures
ahead were likely to lessen the need for replacement power.
    
    RIGS GAIN, OUTPUT STILL NEAR RECORD
    Baker Hughes data on Friday showed the gas-directed
rig count rose by eight last week to 439, its third straight
weekly gain. 

    Drilling for natural gas has mostly been in decline for more
than a year, with gas rigs down 53 percent since peaking in 2011
at 936 in October. But so far production has not shown any signs
of slowing.
    Energy Information Administration gas production data on
Monday showed that gross gas output in October climbed to 73.54
billion cubic feet per day, the second straight monthly record.
        
    INVENTORIES DROP MORE THAN EXPECTED 
    Last week's gas storage report from the EIA showed
inventories for the week ended Dec. 28 fell by 135 billion cubic
feet, well above the Reuters poll estimate of 127 bcf.
    Despite the big draw, total storage of 3.517 trillion cubic
feet is nearly 1 percent above year-ago levels and more than 12
percent above the five-year average. 

    Early withdrawal estimates for Thursday's storage report
range from 155 bcf to 189 bcf. That would be well above the
95-bcf pulled from storage during the same year-ago week. The
five-year average draw for that week is about 149 bcf.
    This is the fourth straight year in which inventories headed
into the heating season at an all-time high, offering a
comfortable cushion to meet any winter spikes in demand.
FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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