UPDATE 3-U.S. natgas futures end higher after front hits 4-week low

Fri May 3, 2013 3:49pm EDT

* Front month slips overnight to four-week low
    * Extended weather outlook continues to trend milder
    * Gas drilling rig count posts 18-year low


    By Joe Silha
    NEW YORK, May 3 (Reuters) - U.S. natural gas futures ended
higher on Friday in choppy trade,  underpinned by short-covering
ahead of the weekend after three straight losing sessions
despite some overnight selling that drove the front contract to
a four-week low.
    Gas inventories started the heating season at record highs,
but cold late-winter weather, a chilly spring and above-average
nuclear plant outages put a huge dent in storage and helped
drive gas prices higher this year.
    But the front month on Thursday saw its biggest one-day drop
in nine months, sinking 7 percent in reaction to a government
report showing an unexpectedly large weekly inventory build.
    Goldman Sachs said Friday that the market reaction to the
large inventory build was "likely overdone" and that they were
maintaining their near-term $4.25 price forecast with a $4.50
average for the second half of 2013.
    Front-month gas futures on the New York Mercantile
Exchange ended up 1.6 cents at $4.041 per million British
thermal units after sliding to a four-week low of $3.977.
    The front contract, which just hit a 21-month high of $4.444
on Wednesday, lost 2.7 percent this week, its second straight
weekly decline after nine consecutive weeks of gains.
    "I think this was just a dead-cat bounce. We had a storage
report that gave some indication of a looser supply-demand
balance, and we should see another bearish report next week,"
said Steve Mosley at The SMC Report in Arkansas.
    Some traders agreed the market may be loosening, either from
more use of coal in power generation or from rising supplies as
higher prices tempt producers to turn on more gas wells.
    With gas production still flowing at or near record highs
and moderating weather likely to slow demand, some traders
expect gas prices to remain under pressure, at least until
homeowners and businesses crank up air conditioners.
    Despite lingering cold and another attempt to move up this
week, chart traders said futures seemed to be struggling, noting
prices broke above $4.40 several times over the last two weeks
only to be turned back by technical selling or profit-taking. 
    After a cold push this week drove some Midwest temperatures
to record lows, Commodity Weather Group noted that the six- to
15-day outlook continued to trend milder, with the Midwest,
South and East likely to see readings close to seasonal ranges. 
  
    
    LARGER-THAN-EXPECTED INVENTORY BUILD 
    On Thursday, data from the U.S. Energy Information
Administration showed total domestic gas inventories rose last
week by 43 billion cubic feet to 1.777 trillion cubic feet.

    Most traders viewed the build as bearish, noting it came in
well above the Reuters poll estimate of 28 bcf. 
    It was only the third storage injection of the stock
building season but the first to exceed market expectations.
Prices fell sharply immediately after the report.
    But current stocks stand at about 118 bcf, or 6 percent,
below the five-year average. That deficit is likely to grow in
next week's report, with early injection estimates ranging from
58 to 91 bcf versus a 30-bcf build during the same week last
year and a five-year average rise for that week of 69 bcf.    

    PRODUCTION CLIMBS DESPITE FEWER RIGS
    Baker Hughes data Friday showed the gas-directed rig
count fell this week by 12 to 353, its lowest since June 1995.

    Drilling for natural gas has mostly been in decline for the
past 18 months, dropping some 62 percent since peaking in 2011
at 936, but so far production has not slowed much, if at all,
from the record high hit last year. 
    The EIA reported on Tuesday that gross gas production in
February unexpectedly climbed after two straight monthly
declines.
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