UPDATE 3-U.S. natural gas futures end down as milder weather arrives

Mon May 6, 2013 3:19pm EDT

* Front month slips early to one-month low
    * Spring weather finally arrives in much of the country
    * Gas drilling rig count hits 18-year low last week


    By Joe Silha
    NEW YORK, May 6 (Reuters) - U.S. natural gas futures,
pressured by milder weather forecast for the next few days that
should slow demand, ended lower on Monday, but the cooler
weather due next week, particularly for the Midwest and South,
limited selling.
   The weakness followed a 40 percent surge in gas prices since
mid-February as cold late-winter weather, a chilly spring and
above-average nuclear plant outages whittled down record high
inventories seen at the start of the heating season.
    While there are still below-normal temperatures in the
forecast, traders noted normal highs are on the rise as summer
approaches and below-normal readings in May are not likely to
trigger much heating or cooling load.
    "The market seems to be trying to move lower, but it doesn't
have the impetus yet. If we get another better-than-expected
storage build (on Thursday), it could corroborate the
downtrend," said Jacob Correll, analyst at Schneider Electric.
    Front-month gas futures on the New York Mercantile
Exchange ended down 3 cents at $4.011 per million British
thermal units after sliding early to a one-month low of $3.971. 
  
    The front contract, which just hit a 21-month high of $4.444
on Wednesday, lost 2.7 percent last week, its second straight
weekly decline after nine consecutive weeks of gains.        
    Last Thursday's unexpectedly-large inventory build triggered
a 7-percent selloff, the biggest one-day drop for the front
contract in nine months.
    Traders said the report may be a sign that the market was
loosening, noting prices above $4 could be dampening demand by
encouraging utilities to use more coal to generate power and
increasing supply by tempting producers to turn on more 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.    
    Chart traders noted futures prices have broken above $4.40
several times over the last few weeks only to be driven back by
technical selling or profit-taking.
    But they also noted decent buying when the front broke below
psychological support at $4 in the last two sessions.
    The latest National Weather Service eight-to-14-day
forecast, issued on Sunday, called for above-normal temperatures
for the western half of the nation and the Northeast, with
below-normal readings in Texas and normal readings in much of
the Midwest and Southeast.
    
    ANOTHER BIG INVENTORY BUILD EXPECTED
    Last week's build was only the third injection of the stock
building season, but it did exceed market expectations and
prices fell sharply immediately after the report. 

    U.S. Energy Information Administration data last week showed
total domestic gas inventories had climbed to 1.777 trillion
cubic feet, about 118 billion cubic feet, or 6 percent, below
the five-year average.
    That deficit is likely to shrink in Thursday's report.
Injection estimates range from 58 to 91 bcf, with most in the
mid-70s. Stocks rose 30-bcf during the same week last year,
while the five-year average increase for that week is 69 bcf.   

    PRODUCTION CLIMBS DESPITE FEWER RIGS
    Baker Hughes data Friday showed the gas-directed rig
count fell last week to an 18-year low of 353. 

    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 last week that gross gas production in
February unexpectedly climbed after two straight monthly
declines. The agency expects marketed gas output in 2013 to hit
a record high for the third straight year.
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