* Moderate U.S. weather forecasts pressure prices
* Record-high production, storage also weigh on market
* Recent gas rig count declines lend some support
By Joe Silha
NEW YORK, Feb 21 Front-month U.S. natural
gas futures ended lower on Tuesday as mild U.S. weather this
week and record-high supplies weighed on prices despite the
recent decline in drilling that could finally slow record
Planned output cuts by several key producers and recent
declines in the gas drilling rig count to a 28-month low helped
drive gas prices up 8 percent last week.
But with production still running at or near all-time highs
and inventories likely to end winter at a record high, most
traders remained skeptical of any upside without much-colder
late-winter weather to kick up heating demand.
The front-month gas futures contract on the New York
Mercantile Exchange finished down 5.8 cents, or 2.2 percent, at
$2.626 per million British thermal units after trading between
$2.575 and $2.673.
"On the weather front, the six- to 10 day and eight- to 14
day forecasts are still showing above-normal temperatures for
the eastern one-third of the U.S. I do not expect the overhang
of natgas inventories to dissipate anytime soon," Energy
Management Institute's Dominick Chirichella said in a report.
"On the producing side, some production has been shut in
both in the U.S. and Canada ... but it is not nearly enough to
have a material impact on the overall supply and demand
balances," he said.
AccuWeather.com expects temperatures in the Northeast and
Midwest, key gas-consuming regions, to mostly average above
normal for the next five days, then cool to seasonal or slightly
below seasonal later this week and early next week.
But in its 11- to 15 day outlook, private forecaster MDA
EarthSat sees above-normal temperatures dominating the eastern
half of the nation, with seasonal or below-seasonal readings
only expected in the West.
SUPPLY GLUT PERSISTS
Baker Hughes data on Friday showed the gas-directed rig
count fell last week by four to 716, its lowest since October
2009. It was the sixth straight weekly decline and stirred more
talk that low prices were finally forcing drillers to slow dry
(Drilling rig graphic:)
On Friday, Encana said it would shut in 250 million
cubic feet per day of North American gas production immediately
and expects to reduce output by up to 600 mmcf per day by the
end of the year.
But many traders remain skeptical of announced production
cuts, noting the planned reductions so far were not enough to
tighten a market oversupplied by as much as 3 billion cubic feet
per day, or more than 4 percent.
Analysts said the recent slowdown in drilling has yet to be
reflected in pipeline flows. They noted that producers have
shifted spending to higher-value oil and gas liquids plays which
still produce plenty of associated gas that ends up in the
market after processing.
Most analysts, noting it will be difficult to balance the
gas market without serious production cuts, do not expect any
major slowdown in gas output until late this year.
STORAGE, A BIG PROBLEM FOR PRICES
Despite last week's price gains, one of the mildest winters
on record has slowed storage draws by about 530 billion cubic
feet, or 33 percent, and left a huge cushion in inventories that
could cap any price gains this year.
Last winter at this time, cold weather had forced storage
owners to pull more than 1.9 trillion cubic feet from inventory
to help meet the surge in heating demand, but this season, only
about 1.1 tcf of storage gas has been burned up, a 42 percent
Data from the U.S. Energy Information Administration last
week showed total domestic gas inventories stood at 2.761 tcf,
still a record high for this time of year.
Stocks are now 817 bcf, or 42 percent, above last year and
765 bcf, or 38 percent above average, a huge cushion that can
easily meet any late-winter spikes in heating demand.
With extended forecasts still not showing any extreme cold
on the horizon and winter winding down, traders said the huge
surplus could pressure prices in late March if contractual
obligations force utilities to cycle gas out of inventory to
meet seasonal turnover requirements.
Gas prices hit a 10-year low of $2.231 in late January.
Early withdrawal estimates for next week's EIA report range
from 110 bcf to 171 bcf versus last year's drop of 102 bcf and
the five-year average decline for that week of 145 bcf.
A Reuters end-winter inventory poll last week showed
analysts expected stocks to end the heating season at an
all-time high of 2.215 tcf, 43 percent above average and well
above the previous record of 2.148 tcf set in 1983.
The inventory glut could also spell trouble for prices late
in the summer stock-building season if inventory owners run out
of room to store gas, forcing more supply into the market.
Estimates for U.S. working gas storage capacity range from
4.1 tcf to 4.4 tcf, a level that could be tested if storage
builds from April through October match last year's 2.2 tcf.