UPDATE 3-Cold forecast drives front U.S. natgas futures to 6-mth high

Mon Dec 2, 2013 3:41pm EST

* Mild weather this week slows demand, cold returns next week

* Record production, comfortable storage could limit upside

By Joe Silha

NEW YORK, Dec 2 (Reuters) - U.S. natural gas futures shrugged off this week's milder weather to end higher on Monday, with the front month driven to a six-month high by colder weather forecasts for next week that should trigger another strong run up in heating demand.

The nearby contract, which has gained for eight straight sessions, finished the holiday-shortened week last week up 4.9 percent. Chilly temperatures in November helped drive the front month up 12.8 percent, its biggest four-week climb in nearly eight months.

While milder weather this week could prompt some profit taking or long liquidation, traders said the much colder outlook for next week should help limit any downside even with lingering concerns about comfortable inventories and record high domestic production.

"Current weather forecasts paint a very cold picture for December with frigid air expected to sweep through the nation creating a large amount of heating demand in the Northeast and Midwest," Gelber & Associates analyst Aaron Calder said, noting the deep freeze was also expected to reach into Texas.

After a mild week this week, private forecaster MDA Weather Services expects cold temperatures to stretch across most of the country next week and continue in northern tier states in the 11- to 15-day period.

Front-month gas futures on the New York Mercantile Exchange settled up 3.4 cents, or 0.9 percent, at $3.988 per million British thermal units. The contract posted a six-month high of $3.993 in after hours trade following the day session close.

While the technicals turned bullish during the steady run-up over the last month, chart watchers expect resistance in the $4 area, noting the contract has moved into very overbought territory with the 14-day relative strength index now at an 8-1/2 month high of 83, according to Reuters data.

Data last week from the U.S. Energy Information Administration (EIA) showed total domestic gas inventories stood at 3.776 trillion cubic feet, 2.6 percent below last year's record highs at that time, but still 0.5 percent above the five-year average.

Early withdrawal estimates for Thursday's storage report range from 109 bcf to 148 bcf, well above the 62 bcf drop during the same year-ago week and the five-year average decline of 41 bcf for that week.

Baker Hughes last week reported that the gas drilling rig count fell for the second straight week, but the declines have been minimal. The count at 367 remains above the 18-year low of 349 set in late June.

The EIA expects U.S. gas production in 2013 to reach a record high for the third straight year, then climb again in 2014.

In the ICE cash market, prices for Tuesday delivery at Henry Hub , the benchmark supply point in Louisiana, climbed 5 cents to $3.84, but late differentials slid to about 14 cents under NYMEX from a 6-cent discount last Wednesday.

Gas on the Transco pipeline at the New York citygate lost 5 cents to $3.82 on the mild midweek outlook, while Chicago was 3 cents higher at $3.92.

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