UPDATE 3-U.S. natgas futures end down slightly after 18-mth high

Thu Mar 21, 2013 3:57pm EDT

* Inventory draw short of expectations, first time in 5 weeks

* Front month hits highest since September 2011, then slips

* Cold to continue through March and into early April

* Coming up: Baker Hughes rig data, CFTC trade data Friday

By Joe Silha

NEW YORK, March 21 (Reuters) - U.S. natural gas futures ended lower on Thursday for a second straight day but the front-month contract still managed to post an 18-month high despite a government report showing a smaller-than-expected decline in inventories last week.

A U.S. Energy Information Administration report showed total domestic gas inventories fell last week by 62 billion cubic feet to 1.876 trillion cubic feet. EIA said reclassifications from base gas to working gas resulted in a 4 bcf increase in working gas stocks in the Producing Region.

Most traders viewed the decline as bearish for prices, noting it was the first time in five weeks that the draw fell short of expectations. A Reuters poll on Wednesday showed traders and analysts had forecast a 70 bcf drop.

"This week's report ... was bearish relative to street expectations," said Mike Tran at CIBC Global World Markets.

But he added, "The string of larger than seasonal normal draws continued for a fourth consecutive week thanks in large part to a persistent late season cold snap. Draws over that term have averaged more than 60% higher than norms and have left end of March storage balances looking much more constructive."

Some traders did see the report as slightly supportive, noting stocks were unchanged during the same week in 2012, while the five-year average decline for that week was 26 bcf.

Cold late-winter weather has helped drive futures up about 25 percent in the last five weeks, helping them reach 18-month highs. Some chart watchers said the market was overbought and due for a profit-taking pullback.

Front-month gas futures on the New York Mercantile Exchange ended down 2.5 cents at $3.935 per million British thermal units after posting an 18-month high of $4.025 at midday. The nearby contract has lost nearly 1 percent in the last two sessions but is still up 1.6 percent so far this week.

While a chilly heating season this year has put a huge dent in inventories and should lend support to prices, some traders expect only limited upside from here, with production still flowing at or near an all-time peak.

Gas prices above $4 could also slow demand by prompting utilities to use more coal rather than gas to generate power and increase supply by encouraging producers to hook up more wells.

Commodity Weather Group still expects cold to dominate for the next 10 days, with some much below normal temperatures forecast for the Midwest and South. The forecaster expects cold to continue into early April but not with the same intensity.

STORAGE DRAW FALLS BELOW EXPECTATIONS

The weekly draw sharply widened the deficit relative to last year by 62 bcf to 502 bcf, or 21 percent below last year's record highs for that time. It also sliced 36 bcf from the surplus versus the five-year average, but storage is still 162 bcf, or 9 percent, above that benchmark.

Early draw estimates for next week's inventory report range from 59 to 94 bcf versus a 45-bcf increase during the same week last year and a five-year average build for that week of 6 bcf.

Stocks seem on track to end the heating season below 1.8 tcf, or just 3 percent above average. A Reuters poll in mid-January showed most analysts had expected stocks to finish winter at about 2 tcf.

Total gas pulled from storage so far this winter is about 2.050 tcf, about 580 bcf, or 39 percent, more than the same time last year and nearly 5 percent above normal.

RIGS CLIMB, OUTPUT NOT SLOWING MUCH

Traders were waiting for the next Baker Hughes drilling rig report on Friday after data last week showed a sharp jump in the gas-directed rig count from the 14-year low posted the prior week.

(Rig graphic:)

EIA still expects marketed gas production to hit a record high for the third straight year.

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