* Futures slip, then rebound after slightly bearish EIA data
* Mild outlook for next two weeks keeps buyers cautious
* Record production, storage also limit upside
* Coming up: Baker Hughes rig data, CFTC trade data Friday
(Releads, adds analyst quote, spread data, updates prices)
By Joe Silha
NEW YORK, Oct 18 Front-month U.S. natural gas
futures, shrugging off a slightly bearish weekly inventory
report, ended up sharply on Thursday, underpinned by technical
buying after prices tested and held support early in the
Domestic gas inventories rose last week by 51 billion cubic
feet to 3.776 trillion cubic feet, data from the U.S. Energy
Information Administration showed.
Most traders viewed the report as slightly bearish, noting
the build came in above the Reuters poll estimate of 48 bcf.
Technical traders noted prices initially sold off on the
data but quickly reversed when the front month tested and held
chart support around $3.40 per million British thermal units, a
level probed several times this week.
"The market held support on the initial sell-off after the
(EIA storage) number. It (the build) was bigger than
expectations, but the friendly factor is that injections have
been considerably smaller than last year and mostly below
average," said Tom Saal at INTL FCStone in Miami.
Some traders agreed the weekly injection was mildly
supportive, noting it came in well below last year's gain of 106
bcf and the five-year average increase for that week of 71 bcf.
Front-month gas futures on the New York Mercantile
Exchange ended up 11.7 cents, or 3.4 percent, at $3.587 after
sliding to an intraday low of $3.401 right after the EIA report.
The nearby contract hit a 2012 high of $3.638 on Friday but
struggled early in the week as milder weather slowed demand. So
far the contract is still down slightly for the week.
Relative strength up front narrowed spreads to winter, with
the January premium to November shrinking 4.5 cents, or 9.3
percent, to 44.1 cents after posting a five-month high on
Many fundamental traders remain skeptical of the upside,
with inventories still at record highs for this time of year and
production at or near an all-time peak, particularly with 10-day
forecasts continuing to trend milder.
The National Weather Service's six- to 10-day outlook issued
on Thursday still shows above-normal temperatures covering
states east of the Rockies, with normal or below-normal readings
forecast for the West.
Nuclear plant outages on Thursday were running nearly 7,000
megawatts above last year at this time and could shift some
demand to gas, but traders noted at least three nuclear units
were expected back during the day. Mild weather this week has
slowed loads and reduced the need for replacement generation.
Traders also noted concerns that recent gains in gas prices
could increase supply by encouraging producers to hook up more
wells and slow demand by making gas less competitive with coal
for power generation.
The weekly storage build sliced the surplus relative to last
year by 55 bcf to 181 bcf, or 5 percent above the same week in
2011. It also trimmed 20 bcf off the excess versus the five-year
average, reducing that surplus to 249 bcf, or 7 percent.
(Storage graphic: link.reuters.com/mup44s )
While a huge inventory overhang, which peaked in late March
at nearly 900 bcf, has been cut by 80 percent, inventories are
still at record highs for this time of year.
At 89 percent full, stocks are already above the average
peak for the year of 3.7 tcf typically hit in early November.
Without some unseasonably cold weather soon, stocks are
likely to grow for three or four more weeks and easily end the
injection season above last year's all-time high of 3.852 tcf.
Early injection estimates for next week's EIA report range
from 52 bcf to 77 bcf versus a year-earlier build of 95 bcf and
the five-year average increase for the week of 65 bcf.
PRODUCTION STRONG DESPITE DRILLING DECLINES
Traders await the next drilling rig report from Baker Hughes
Drilling for natural gas has been in a near-steady decline
for the last year, with the gas-directed rig count down some 55
percent and posting a 13-year low last week.
But so far, production has shown no significant 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.
The EIA last week said it expected marketed gas production
in 2012 to be up about 4 percent from 2011's record levels, with
a 0.5 percent gain predicted in 2013.
(Reporting by Joe Silha; Editing by Dale Hudson and Sofina