January 18, 2013 / 2:51 PM / in 5 years

UPDATE 3-Cold sends US natgas futures up, front hits 6-week high

* Weekly inventory declines beat estimates for third week
    * Record high production limits upside

 (Updates to close, adds analyst quote, Baker Hughes rig data,
updates prices)
    By Joe Silha
    NEW YORK, Jan 18 (Reuters) - U.S. natural gas futures ended
higher on Friday, the sixth gain in the last seven sessions,
backed by a bullish weekly inventory report on Thursday and
fairly cold forecasts for the next 10 days that should boost
heating needs.
    While the frigid weather outlook should support prices in
the near term, many traders remain skeptical of the upside, with
inventories still relatively high and production flowing at or
near an all-time peak.
    "There is more heating demand on the way, but we expect gas
powered electricity generation to pull back if prices continue
to rise. Continued forecasts for cold weather won't move this
market higher if power generators dump gas and return to coal,"
Gelber & Associates analyst Aaron Calder said in a report. 
    Some traders agreed that if gas prices climb much higher, to
near the $4 per mmBtu mark, gas could lose its competitive edge
and prompt some power generators to switch back to coal. 
    Front-month gas futures on the New York Mercantile
Exchange ended up 7.2 cents, or 2.1 percent, at $3.566 per
million British thermal units after climbing late to a six-week
high of $3.578.
    The front contract ended the week up 7.2 percent, its
biggest weekly gain in two months. The contract has climbed
nearly 15 percent over the last seven sessions.
    Chart traders noted the price run up late this week drove
the near month above resistance at the 40-day moving average for
the first time in six weeks, a bullish technical sign.
    Next resistance was seen at the early December high in the
$3.75 area and then at the 2012 high of $3.933 hit in November.
    MDA Weather Services on Friday noted its six- to 10-day
forecast had turned a bit colder for the eastern Midwest to the
Northeast, with "strong" below-normal temperatures expected.
    Traders said gas prices could pick up support from nuclear
plant outages, which are running at about 9,100 megawatts late
this week, or 2,200 MW above average for this time of year.
    Gas-fired plants are typically used to offset any lost
nuclear generation, and traders said the colder weather ahead
should increase the need for replacement power.
    
    GAS RIG COUNT FALLS, PRODUCTION STILL NEAR RECORD
    Baker Hughes data on Friday showed the gas-directed rig
count fell by five this week to 429, the second straight weekly
decline. 
    (Rig graphic: r.reuters.com/dyb62s) 
    Drilling for natural gas has mostly been in decline for more
than a year, with gas rigs down some 54 percent since peaking in
2011 at 936 in October. The gas rig count is hovering just above
the 13-1/2-year low of 413 posted in early November.  
    But so far production has not shown any signs of slowing.
    The U.S. Energy Information Administration estimates that
output in 2013 will hit a record high for a third straight year.

    ANOTHER BIG STORAGE DRAW 
    EIA data on Thursday showed total domestic gas inventories
fell last week by 148 billion cubic feet to 3.168 trillion cubic
feet. 
    Traders viewed the decline as bullish, noting it was well
above the Reuters poll estimate of 136 bcf and the third
straight week that the inventory draw exceeded expectations.
    Traders said well freeze offs in the Rockies and utilities
switching from coal to cheaper gas to generate power have helped
back the stronger inventory withdrawals.
    The weekly draw sharply widened the storage deficit relative
to last year by 59 bcf to 147 bcf, or 4 percent. While it also
trimmed 4 bcf from the surplus versus the five-year average,
stocks are still high at 316 bcf, or 11 percent above average.
    (Storage graphic: link.reuters.com/mup44s)           
   
    Early withdrawal estimates for next week's storage report
range from 122 bcf to 190 bcf. Stocks fell an adjusted 162 bcf
during the same week last year, while the five-year average
decline for that week is 176 bcf.

 (Additional reporting by Eileen Houlihan; Editing by Bob
Burgdorfer and Tim Dobbyn)

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