UPDATE 3-Weather, storage back U.S. natural gas futures gains

Thu Dec 26, 2013 3:23pm EST

NEW YORK Dec 26 (Reuters) - Front U.S. natural gas futures ended higher on Thursday after some early selling, backed by expectations for a bullish weekly inventory report on Friday and cold weather forecasts for the next two weeks that should stir more demand for heating.

Commodity Weather Group noted that computer models continued to project a colder-than-normal pattern over the next two weeks for the central, eastern and southern United States, with the strongest cold expected in the six- to 10-day period.

"The weather looks supportive enough to keep prices above $4 (per mmBtu), and people are expecting another supportive weekly inventory report, below last week's record high but well above the historical average," said Tom Saal, senior vice president at INTL FCStone in Miami.

Front-month January gas futures on the New York Mercantile Exchange ended up 1.7 cents at $4.433 per million British thermal units after trading between $4.377 and $4.465.

Chilly early winter weather has helped drive the front month up about 26 percent since Nov. 1, with the contract posting a 2-1/2 year high of $4.532 on Monday.

The steady move up in prices over the last seven weeks has broken some key technical resistance along the way and turned the chart picture bullish. But some traders said the market was overbought and due for some selling by longs taking profits.

Strong demand for heating this winter has burned up a lot of gas in inventory, with total storage withdrawals so far more than double what would normally be expected. That has prompted analysts to scale back end-winter inventory estimates.

This Friday's Energy Information Administration report is likely to show another above-average drawdown. A Reuters poll on Thursday showed traders and analysts expect to see a 177 billion cubic feet weekly inventory draw when the EIA releases its storage report on Friday at 10:30 a.m. EST.

Stocks fell 74 bcf during the same week last year, while the five-year average decline for the week is 125 bcf.

The report will be delayed one day this week due to the Christmas holiday.

EIA data last week showed total gas inventories fell by a record 285 bcf, eclipsing the previous benchmark drop of 274 bcf set in January 2008.

Total stockpiles stand at 3.248 trillion cubic feet, 488 bcf, or 13 percent, below last year, and 261 bcf, or 7 percent, below the five-year average.

If drawdowns for the rest of the heating season match the five-year average pace, storage would end winter below 1.5 tcf. That would be the lowest end-winter inventory since 2008 and could help prop up prices next year as utilities scramble to rebuild stocks for next heating season.

In the ICE cash market, prices for Friday delivery at Henry Hub , the benchmark supply point in Louisiana, slipped 6 cents to $4.40, with late differentials weakening to 8 cents under NYMEX from a 1-cent discount on Tuesday.

Gas on the Transco pipeline at the New York citygate lost 10 cents to $4.56 despite the chilly Friday outlook. Chicago gas was 12 cents lower at $4.69.

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