UPDATE 3-Front US natgas futures end down after 17-month high

Wed Mar 20, 2013 3:50pm EDT

* Front month dips after hitting highest since October 2011
    * Futures open interest sets third consecutive record high
    * Cold to continue through March, early April turns milder
    * Coming Up: EIA, Enerdata natgas storage data on Thursday


    By Joe Silha
    NEW YORK, March 20 (Reuters) - Front-month U.S. natural gas
futures ended slightly lower on Wednesday after posting a
17-month high in overnight trade, as investors took profits
despite cold weather forecasts and bullish inventory
expectations for this week.
    Cold late-winter weather has helped drive futures up sharply
over the last month, but some chart watchers agreed the front
contract was overbought and due for a profit-taking pullback
after gaining nearly 9 percent in the previous five sessions,
its biggest five-day run up in two months.
    Traders said a milder turn in the outlook for early April
weather also prompted some futures selling.
    "I think we saw a little profit taking and people responding
to the morning forecast which took some of the heating demand
out of the market," said Aaron Calder, an analyst at Gelber &
Associates in Houston.
    Front-month gas futures on the New York Mercantile
Exchange ended down 0.9 cent at $3.96 per million British
thermal units after climbing overnight to $3.976, its highest
since October 2011.
    The recent price rise - futures are up more than 25 percent
in the last month - has been accompanied by strong gains in open
interest, a bullish sign indicating that new buying and not
short covering has fueled much of the upside.
    Futures-only open interest hit a record high for a third
straight day on Tuesday, climbing more than 19,000 contracts to
1,340,116.
    Traders said some of that new length may be decided to cash
out ahead of Thursday's inventory report.
    A cold winter has put a huge dent in inventories and should
lend support to prices this year, but some traders agreed that
the upside may be limited because supplies remained comfortable,
with production flowing at or near an all-time peak. 
    High gas prices above $4 could slow demand by prompting
utilities to use more coal rather than gas to generate power and
also increase gas supply by encouraging producers to hook up
more wells.
    Forecaster MDA Weather Services still expects cold to
blanket most of the nation for the next 10 days but noted that
the 11-to-15-day outlook turned milder for the South and East.
    
    ANOTHER STRONG STORAGE DRAW EXPECTED
    Traders were waiting for the next U.S. Energy Information
Administration storage report on Thursday.
    Inventory withdrawals have beat expectations for four
straight weeks, and traders and analysts were looking for
another above-average draw on Thursday, with most expecting
inventories to have dropped by 70 billion cubic feet last week,
according to a Reuters poll.  
    Traders said a draw of that size would be supportive, noting
stocks were unchanged during the same week in 2012, while the
five-year average decline for that week is 26 bcf.

    Strong weekly withdrawals have prompted analysts to sharply
lower estimates for end-winter storage, with many now expecting
stocks to drop below 1.8 tcf, or about 4 percent above average,
before inventory rebuilding begins again in April.
    A Reuters poll in mid-January showed most analysts had
expected stocks to finish the heating season at about 2 tcf.
    So far this heating season, about 530 bcf, or 36 percent,
more gas has been pulled from storage than last year at this
time, but traders noted that stocks are still relatively high at
198 bcf, or 11 percent, above the five-year average.
    
    RIGS CLIMB, OUTPUT NOT SLOWING MUCH 
    Baker Hughes data last week showed the gas-directed
drilling rig count jumped sharply after posting a 14-year low
the prior week. 

    While the EIA last week lowered its growth forecast for
2013, it still expects marketed gas production to hit a record
high for the third straight year.
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