UPDATE 3-Front U.S. natgas futures end up, 1st gain in 5 sessions

Thu Apr 4, 2013 4:00pm EDT

* Milder U.S. weather next week expected to slow demand
    * Nuclear plant outages slip back below normal
    * Coming up: Baker Hughes rig data, CFTC trade data Friday


    By Joe Silha
    NEW YORK, April 4 (Reuters) - Front U.S. natural gas
futures, shrugging off milder weather  forecasts for next week,
ended higher on Thursday for the first time in five sessions,
backed by a government report showing a larger-than-expected
inventory withdrawal for last week.
    A U.S. Energy Information Administration report showed total
domestic gas inventories fell last week by 94 billion cubic feet
to 1.687 trillion cubic feet. 
    Most traders viewed the decline as neutral or supportive for
prices, noting stocks usually build slightly that week and that
the draw came in above market expectations. Traders and analysts
polled by Reuters had expected a 91-bcf draw. 
    It was the first time since September 2011 that gas
inventories dropped below the five-year average, a supportive
sign particularly with another draw expected next week.
    Front-month gas futures on the New York Mercantile
Exchange ended up 4.7 cents, or 1.2 percent, at $3.947 per
million British thermal units. The contract hit an intraday high
of $3.976 right after the EIA data at 10:30 a.m. EDT, then slid
to the day's low of $3.861.
    "It was a slightly bullish (EIA) number, and next week we
should see another withdrawal which should keep aggressive
sellers on the sideline, but once we get some (milder) shoulder
month weather, we should see lower prices," said Tom Saal,
senior vice president at INTL FCStone in Miami.
    Cold late-winter temperatures and above-average nuclear
plant outages have helped put a huge dent in inventories and
drive futures prices up nearly 30 percent since mid-February.
    The front contract posted a 19-month high of $4.121 just
last week. But despite chilly weather this week, many traders
expect milder spring temperatures to soon slow demand and bring
out the sellers, noting production was still flowing at robust
levels and there was plenty of new length in the market.
    Recent price gains have been accompanied by a steady climb
in futures open interest which hit record highs in 13 straight
sessions, signaling that new longs, not shorts covering
positions, were fueling much of the upside.
    But some chart traders worry that milder temperatures and
slower demand could trigger a stampede by those longs looking to
quickly take profits and cash out.
    While the Plains and part of the Midwest could remain cold
next week, MDA Weather Services expects above- to
much-above-normal temperatures to stretch from Texas to the
Northeast in its 11- to-15-day outlook.
    
    ANOTHER STRONG STORAGE DRAW 
    Futures tried to rally after the weekly inventory report but
quickly stalled, then briefly headed lower amid prospects that
winter heating demand might finally be poised to slow.
    The weekly inventory withdrawal sharply widened the deficit
relative to last year by 137 bcf to 779 bcf, or 32 percent below
last year's record highs at that time.
    It also wiped out the surplus versus the five-year average
for the first time in more than 18 months, leaving storage at 37
bcf, or 2 percent, below that benchmark.
    Early draw estimates for next week's storage report range
from 20 to 36 bcf versus an 11-bcf build during the same week
last year and a five-year average rise for that week of 15 bcf.
    Stocks will likely end the heating season about 33 percent
below last winter's record high finish of 2.48 tcf and 4 percent
below average for that time.
    
    OUTPUT STARTS TO SLOW?
    Traders were waiting for the next Baker Hughes 
drilling rig report on Friday. The gas-directed drilling rig
count has fallen in four of the last five weeks, slipping last
week to a 14-year low of 389.

    Despite the rig declines over the last year or so, output
has not slowed much from the record high pace hit last year.
    EIA data last week showed gross natural gas production in
January fell for the second straight month and dropped below
year-ago levels for the first time since February 2010.
    But it is still unclear if recent monthly output declines
were due to well freeze-offs from the cold or producers curbing
dry gas flows because prices were not that attractive.
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