* Light weekly inventory build seen as bullish, prices spike
* Mild outlook for next week keeps buyers cautious
* Record production, storage also limit upside
* Coming up: Baker Hughes rig data, CFTC trade data Friday
(Releads, adds analyst quote, updates prices)
By Joe Silha
NEW YORK, Oct 11 U.S. natural gas futures
settled higher on Thursday for a fourth straight day, with a
government report showing a weekly inventory build well below
market expectations driving the front contract to a new high for
The U.S. Energy Information Administration said domestic gas
inventories rose last week by 72 billion cubic feet to 3.725
trillion cubic feet.
Traders and analysts viewed the build as bullish, noting it
was well below the Reuters poll estimate of 80 bcf, the year-ago
injection of 108 bcf and the five-year average increase for that
week of 84 bcf.
"This injection has provided a catalyst for the market to
make a move. There is clear buying pressure behind this move ...
creating the potential for further gains, but today's price
response was a bit of an overreaction," Gelber & Associates
analyst Aaron Calder said in a report.
Calder noted that inventories still look set to begin winter
at record highs, and gas prices at current levels are likely, at
some point, to discourage more use by electric utilities.
Front-month gas futures on the New York Mercantile
Exchange ended up 12.9 cents, or 3.7 percent, at $3.604 per
million British thermal units after climbing early to a new 2012
high of $3.628 shortly after the EIA report.
The nearby contract has gained more than 6 percent so far
this week, backed by cold Northeast and Midwest weather that has
stirred decent heating demand.
Nuclear plant outages, roughly averaging about 20,000
megawatts this week, have also helped underpin prices, adding as
much as 600 million cubic feet, or nearly 1 percent, to daily
gas demand, according to data from Thomson Reuters Analytics.
But with inventories at record highs for this time of year
and production at or near an all-time peak, many fundamental
traders remain skeptical of the upside, particularly with milder
weather forecast for next week likely to slow demand.
Concerns are also growing that producers will hook up wells
that have been drilled but not flowing to cash in on higher
prices ahead of the peak-demand winter heating season.
Competition from low-priced coal may also temper buying. Gas
priced well above $3 has become less competitive with coal and
could prompt some utilities that were burning cheaper gas for
power generation to switch back.
Any let-up in that demand, which helped prop up gas prices
all summer, could force more gas into already-packed
LIGHT STORAGE BUILD
The weekly injection sliced the surplus relative to last
year by 36 bcf to 236 bcf, or 7 percent above the same week in
2011. It also trimmed the excess versus the five-year average,
reducing that surplus by 12 bcf to 269 bcf, or 8 percent.
(Storage graphic: link.reuters.com/mup44s )
Despite the light build, inventories are still at record
highs for this time of year and are likely to end the
stock-building season above last year's all-time high of 3.852
Storage, now at 88 percent full, is at a level that exceeds
the average peak for the year of about 3.7 tcf typically hit in
early November. Without more unseasonably cold weather this
month, stocks are likely to grow for four or five more weeks.
If weekly builds into early November match the five-year
average, inventories will begin the upcoming heating season at
about 3.97 tcf, 3 percent above last year's record high but 6.3
percent below EIA's 4.239-tcf estimate for capacity.
Early injection estimates for next week's EIA report range
from 30 bcf to 60 bcf versus a year-earlier build of 106 bcf and
the five-year average increase for the week of 71 bcf.
Traders were waiting for the next Baker Hughes drilling rig
report on Friday.
Drilling for natural gas has been in a near-steady decline
for the last year, with the gas-directed rig count down some 53
percent since last October and posting a 13-year low just two
But so far, production has shown few, if any, signs of
(Rig graphic: r.reuters.com/dyb62s )
While dry gas drilling has become largely uneconomical at
current prices, gas produced from more-profitable shale oil and
shale gas liquids wells has kept output near record highs.
In its October short-term energy outlook on Wednesday, EIA
still expects marketed natural gas production in 2012 to be up
about 4 percent from 2011's record levels, with a smaller 0.5
percent gain predicted in 2013.
On the demand side, the agency expects total consumption to
climb 4.7 percent this year but slip 0.2 percent in 2013 as
expected declines in electric power use offset increases from
residential, commercial and industrial users.
(Reporting By Joe Silha; editing by Jim Marshall)