* Front futures break below support, then trim losses
* Record high storage, production weigh on prices
* Chilly outlook for next week limits downside
* Coming up: Baker Hughes rig data, CFTC trade data Friday
(Adds analyst quote, updates prices)
By Joe Silha
NEW YORK, Oct 25 Front-month U.S. natural gas
futures ended lower on Thursday for the third time this week, as
traders shrugged off a neutral weekly inventory report and
focused instead on two more weeks of builds that should drive
storage to a new all-time high.
Gas prices, which have been stuck in a technical range for
the last few weeks, blew through key support right after the
inventory report but managed a slight recovery by the close.
"The market broke major support at $3.40 (per million
British thermal units) after the (storage) number but didn't
close below it, so we're still in a range," said Dean Rogers,
senior analyst at Kase & Company in New Mexico.
"I think we'll trade sideways for now, but heading into
winter, we should see higher prices," he added.
Gas prices for most of October have been trading between
$3.40 and $3.65 per million British thermal units.
While the weekly inventory build matched the Reuters poll
estimate of 67 billion cubic feet and was viewed as neutral,
traders said the market seemed more focused on next week's
report, when storage should post a record high.
The U.S. Energy Information Administration report showed
total gas inventories climbed last week to 3.843 trillion cubic
feet, a record high for that time of year and just 9 bcf shy of
the all-time peak of 3.852 tcf hit last November.
Early build estimates for next week's EIA report range from
34 bcf to 68 bcf, which would easily drive stocks to new highs.
Front-month November gas futures on the New York
Mercantile Exchange, which expire on Monday, ended down 1.6
cents at $3.434 per million British thermal units after sliding
to an intraday low of $3.36 shortly after the EIA report.
Most other months settled 1 cent to 4 cents higher.
The nearby contract posted a 2012 high of $3.648 on Monday,
but has lost 5 percent so far this week, pressured by mild
weather this week and the milder outlook for early November.
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 15-day
forecasts showing a return to more seasonal weather after a cold
shot for the eastern half of the nation next week.
Some traders and analysts caution that if gas prices moved
much higher, say towards the $4 mark, they could increase supply
by encouraging producers to hook up more wells and dampen demand
by making gas less competitive with coal for power generation.
That would loosen the supply/demand balance and could
trigger another downward spiral in gas prices, which hit 10-year
lows below $2 back in April.
INVENTORIES NEAR ALL-TIME PEAK
The weekly storage build trimmed the surplus relative to
last year by 28 bcf to 153 bcf, or 4 percent above the same week
in 2011. However, it added 2 bcf to the excess versus the
five-year average, increasing that surplus to 251 bcf, or 7
(Storage graphic: link.reuters.com/mup44s )
While a huge inventory overhang, which peaked in late March
at nearly 900 bcf, has been cut 83 percent, storage is 91
percent full and already well above the average peak for the
year of 3.7 tcf typically hit in early November.
Current estimates by some traders and analysts show stocks
peaking at about 3.925 tcf before winter withdrawals begin.
PRODUCTION STRONG DESPITE DRILLING DECLINES
Traders were waiting for the next drilling rig report from
Baker Hughes on Friday.
Drilling for natural gas has been in decline for most of the
last year, with gas rigs falling some 54 percent since peaking
last year at 936 in October.
The Baker Hughes gas-directed rig count posted a 13-year low
two weeks ago, but so far production has not shown any
significant signs of slowing.
The associated gas produced from more profitable shale oil
and shale gas liquids wells has kept output near record highs.
(Rig graphic: r.reuters.com/dyb62s )
The gas rig count has risen three times in the last five
weeks, stirring concerns that the recent run up in gas prices
might be encouraging some producers to increase well flows.
The EIA recently 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 for 2013.
(Reporting By Joe Silha; Editing by Tim Dobbyn and Marguerita