* Futures drop 6 pct this week, biggest wkly drop in 5 mths
* Storm, record high supplies weigh on prices
* Chilly outlook for next week limits downside
(Adds trader quote, Baker Hughes rig data, updates prices)
By Joe Silha
NEW YORK, Oct 26 U.S. natural gas futures ended
lower on Friday for the fourth time this week, pressured by
record high supplies, moderating weather forecasts for early
November and concerns about the bearish impact of Hurricane
Sandy on East Coast demand.
While cooler weather was moving into the Midwest this week
and expected to hit the East early next week, traders noted the
cold shot was expected to be short-lived, with more seasonal
weather forecast in early November.
Hurricane Sandy, now located off the coast of Florida, was
expected to move up the East Coast over the next few days and
dampen demand in its wake, but some nuclear facilities along its
path could be closed due to possible flooding.
"If the storm comes inland, you're looking at losing demand,
not production, and that's bearish," a Texas-based trader said.
Front-month November gas futures on the New York
Mercantile Exchange, which expire on Monday, ended down 3.4
cents, or 1 percent, at $3.40 per million British thermal units
after trading between $3.355 and $3.442.
The nearby contract posted a 2012 high of $3.648 on Monday,
but lost 6 percent this week, its biggest one-week slide in
nearly five months.
Gas prices have traded below key support at $3.40 per
million British thermal units for the last two days but managed
to eke out a close above that level. Technical traders said a
front month close below $3.40 would be viewed as bearish and
likely set the stage for more downside.
Many fundamental traders remain skeptical of any 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.
DRILLING DECLINES, PRODUCTION STAYS STRONG
Baker Hughes data on Friday showed the gas-directed rig
count fell this week by 11 to 416, the lowest since June 1999.
(Rig graphic: r.reuters.com/dyb62s )
The decline in gas-directed drilling over the last year -
the count is down 55 percent since peaking at 936 last October -
has fed expectations that producers might soon curb record
output. 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 gas flowing at or near a
The gas rig count has risen three times in the last six
weeks, stirring concerns that the run up in gas prices earlier
this month might be encouraging some producers to increase well
INVENTORIES NEAR ALL-TIME PEAK
Data from the U.S. Energy Information Administration on
Thursday 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
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.
Early build estimates for next week's EIA report range from
34 bcf to 74 bcf, which would easily drive stocks to new highs.
Last year during that week, stocks rose 82 bcf, while the
five-year average is 57 bcf.
(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.
(Additional reporting by Eileen Houlihan;editing by Sofina