UPDATE 3-US natgas futures end up slightly, 1st gain in 3 sessions

Mon Feb 11, 2013 3:59pm EST

* High inventories, record production also weigh on prices
    * Brief cold shot late this week limits downside


    By Joe Silha
    NEW YORK, Feb 11 (Reuters) - Front-month U.S. natural gas
futures ended higher on Monday for the first time in three
sessions, backed by decent utility demand and technical buying
after an early test of support held.
    "The fundamentals look poised to set up a rally. Electricity
generators are likely to use more gas when prices are under
$3.25 (per mmBtu) and more heating demand is on the way," Gelber
& Associates analyst Aaron Calder said in a report.
    Traders said gas prices near current levels were likely to
pick up support from utilities switching from coal to cheaper
gas for power generation. 
    In addition, they also noted that nuclear plant outages were
running at more than 3,100 megawatts above average for this time
of year. Gas-fired units are typically used to offset any lost
nuclear generation, and the colder weather expected later this
week and next should increase the need for replacement power.   
    Front-month gas futures on the New York Mercantile
Exchange ended up 0.7 cent at $3.279 per million British thermal
units, after trading in a range between $3.207 and $3.295. 
    The front contract lost 0.9 percent last week following a
4.2 percent slide the week before. But technical traders noted
the near month tested and held the recent low in the $3.20 area,
then closed higher, which could signal an upside reversal.
Resistance was seen between $3.45 and $3.50.
    Despite the blizzard that pounded the Northeast over the
weekend, some traders see only limited potential for an upside
move. They note that winter is winding down, inventories remain
high and production is still at or near an all-time peak.
    MDA Weather Services expects colder temperatures to move
into the Midwest and East next weekend, but the private
forecaster sees warmer readings returning to both regions in the
11-to-15-day outlook.    

    ANOTHER BELOW-AVERAGE STORAGE DRAW 
    U.S. Energy Information Administration data last week showed
total domestic gas inventories for the week ended Feb. 1 fell by
118 billion cubic feet to 2.684 trillion cubic feet.
    Most traders viewed the report as bearish, noting the draw
came in well below the Reuters poll estimate of 132 bcf.
    
    While the withdrawal widened the deficit relative to last
year to 226 bcf, or 8 percent, it left storage relatively high
at 351 bcf, or 15 percent, above the five-year average for that
time of year. 
    Withdrawal estimates for Thursday's storage report range
from 128 bcf to 180 bcf. Stocks fell by 113 bcf in the same week
last year. The five-year average drop for the week is 154 bcf.
    If withdrawals for the rest of winter match the five-year
average, stocks will end March at 2.079 tcf, about 20 percent
above normal but 16 percent below last year, when inventories
finished a very mild heating season at a record high 2.48 tcf.
           
    DRILLING DECLINES, PRODUCTION FAILS TO SLOW
    Baker Hughes data on Friday showed the gas-directed
drilling rig count fell last week for the fourth time in five
weeks, dropping by three to 425. 
    But while the gas rig count is hovering not far above the 
13-1/2 year low of 413, hit three months ago, production has
shown no significant signs of slowing.
       
    Producers have curbed dry gas drilling, but the associated
gas produced by more profitable liquids-rich wells has kept gas
flowing at or near a record pace.
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