| NEW YORK
NEW YORK U.S. natural gas futures were trading nearly flat on Monday, with prices underpinned by chilly Northeast and Midwest weather this week that should boost demand for heating despite ongoing concerns about record-high supplies.
While cold weather in two key gas consuming regions could prop up prices temporarily, some traders remain skeptical of the upside, with temperatures expected to moderate later in the week and inventories and production still at or near all-time highs.
"Today the contract started higher as traders were welcomed to ... weather forecasts which showed colder temperatures almost across the board for the next two weeks," Gelber & Associates analyst Aaron Calder said in a report.
Calder noted November could be the coldest since 2002, which should trigger significant heating demand in the coming weeks.
At 1:05 p.m. (1805 GMT), front-month gas futures on the New York Mercantile Exchange were down 0.5 cent at $3.549 per million British thermal units after trading between $3.506 and $3.588. The nearby contract hit a one-year high of $3.82 last Tuesday.
Nuclear plant outages this week were still running well above last year and the five-year average, and should add some demand for gas since plants burning gas typically come into service, if needed, to replace missing nuclear generation.
But some traders caution that if gas prices move much higher, towards the $4 level, 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.
Technical traders also said that Friday's settle below support at $3.60, an area of previous resistance, could turn the chart picture bearish, but most needed to see another lower close on Monday for confirmation.
Sandy knocked out power last week to nearly 8.5 million customers and cut demand for gas used to generate electricity by up to 1 billion cubic feet per day. But power outages early Monday had been cut to about 1.3 million.
After some chilly weather for the eastern half of the nation for the next few days, private forecaster MDA EarthSat expects temperatures to average normal or above normal in its six- to 10-day and 11- to 15-day outlooks.
GAS DRILLING CLIMBS, PRODUCTION STAYS STRONG
Baker Hughes data on Friday showed that the gas-directed rig count rose last week by eight to 424 after posting a 13-year low the previous week.
While the gas rig count has gained only 10 times this year, four of those gains have occurred in the last seven weeks, stirring concerns that the recent uptick in gas prices might be encouraging producers to increase supply.
Still, drilling for natural gas has been in decline for most of the last year, with gas rigs falling some 55 percent since peaking at 936 in October 2011. The problem is that production, so far, has not shown any significant signs of slowing.
(Rig graphic: r.reuters.com/dyb62s )
The associated gas produced from more-profitable shale oil and shale gas liquids wells has kept gas flowing this year at or near a record pace.
Traders were waiting for the U.S. Energy Information Administration's short-term energy outlook on Tuesday, looking for the agency's latest estimates on gas supply and demand.
INVENTORIES NOTCH NEW PEAK
EIA data last week showed domestic gas inventories for the week ended October 26 had climbed to 3.908 trillion cubic feet, easily eclipsing the previous record high of 3.852 tcf hit last November.
(Storage graphic: link.reuters.com/mup44s )
Based on recent weather forecasts, traders expect one or two more weekly inventory builds to drive storage further into record territory, peaking just shy of 3.95 tcf before winter withdrawals begin.
Early injection estimates for Thursday's EIA storage report range from 15 bcf to 40 bcf. Last year during that week, stocks rose 48 bcf, while the five-year average is 36 bcf.
While a huge inventory overhang, which peaked in late March at nearly 900 bcf, has been cut by 85 percent, storage is 92 percent full and should provide a comfortable cushion to meet any spikes in demand or unexpected disruptions in supply.
(Reporting By Joe Silha; Editing by Tim Dobbyn)