January 19, 2012 / 9:13 PM / 8 years ago

UPDATE 2-US natgas glut, mild temps drive prices to 10-year low

* Front-month futures lowest since February 2002
    * Mild forecasts into February continue to pressure prices
    * Record storage, production also weigh on sentiment
    * Coming up: Baker Hughes rig data, CFTC trade data Friday

 (Recasts, updates prices, market activity)	
    By Joseph Silha	
    NEW YORK, Jan 19 (Reuters) - U.S. natural gas futures ended down
sharply on Thursday, their eighth straight session loss, with mild
winter weather and record high storage and production driving prices to a
10-year low.	
    Gas prices have been pounded this year, sinking 24 percent in the last eight
sessions -- their steepest eight-day drop in six years -- as record-high
supplies overwhelmed demand.	
    "Supply is still growing, and winter has been nonexistent, so inventory
draws (usage) have been very light," said Earl Sweet, managing director at BMO
Capital Markets in Toronto.	
    An unusually mild winter so far has dramatically slowed the need to heat
homes and businesses, with consumption in December sliding nearly 4 percent from
the same month a year earlier.	
    With January also fairly mild and forecasts into early February showing more
of the same, there seems to be little chance for a weather-related market
rebound soon.	
    "So far, this is the fourth warmest winter on record, and looking at the
next couple of weeks, it doesn't bode well for natural gas demand," said Travis
Hartman, meteorologist at private forecaster MDA EarthSat.	
    Hartman also said the outlook for February was also looking fairly mild, at
least for the southern and eastern parts of the United States.	
    Front-month gas futures on the New York Mercantile Exchange settled
down 15 cents, or 6 percent, at $2.322 per million British thermal units after
sliding late to $2.311, the lowest for the nearby contract since February 2002.	
    For a Take a Look on natural gas click 	
       	
    STORAGE, THE BIG ROADBLOCK TO HIGHER PRICES	
    Gas prices have mostly been weighed down for the past year or two by record
or near record high gas production, primarily from shale.	
    But after a mild November and December, focus gradually shifted to the huge
inventory surplus relative to last year and the five-year average, which could
turn out to be an even bigger problem for prices this year.	
    U.S. natural gas inventories started the heating season at record highs and
at 3.290 trillion cubic feet, are still at a record high for this time of year,
standing at 539 bcf, or nearly 20 percent, above the same week last year, and
566 bcf, or 21 percent, above the five-year average. 	
    With no extreme cold on the horizon, inventory draws for the next few weeks
are expected to come in light, meaning the surpluses are likely to grow even
further.	
    Early withdrawal estimates for next week's EIA report range from 120 bcf to
176 bcf versus last year's drop of 184 bcf and the five-year average decline for
this week of 173.	
    Most analysts now expect inventories to end the heating season at about 2.1
tcf, well above the average of 1.55 tcf and near the all-time high for
end-winter storage of 2.148 tcf set in 1983.	
    Concerns are growing that high storage could drive prices even lower during
the spring and summer stock building season if storage operators run out of room
to stockpile gas by early autumn.	
    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.	
	
    WHEN WILL LOW PRICES FINALLY SLOW PRODUCTION?	
    While low prices should eventually discourage new output as producers shift
spending from dry gas to more-profitable oil or gas-liquids prospects, gas
production in 2012 is still expected to hit a record high for a second year.	
    ConocoPhillips said Wednesday that the amount of natural gas shut in due to
low prices will be "very modest". 	
    Last week's drop in the gas rig count to a two-year low and reports some
producers were cutting back budgets for gas drilling could eventually tighten
supplies, but most analysts agree there was little on the near horizon that
could stem the bearish tide.	
    Traders were waiting for the next Baker Hughes drilling rig report on Friday
after last week's data stirred talk that low prices were beginning to crimp
profits and might finally lead to a slowdown in production.
    But analysts note that there is still plenty of associated gas that flows
even as producers chase higher-value natural gas liquids (NGL) like butane and
propane. Most do not expect any major slowdown in dry gas output until later
this year at the earliest.	
    "Even though there will be less investment in dry gas production, the focus
on liquids will still add quote a bit of gas to the market," BMO's Sweet said.	
      	
      	
    More fuel switching by utilities and industry to gas from costlier fuels
such as oil and coal could eventually yield more demand.	
    Tighter environmental rules on emissions this year should also favor gas, a
less polluting fossil fuel, while various plans to export gas as LNG might also
help soak up some of the surplus supply.	
    But a government report showing gas prices could rise significantly if
export plans are realized could stir political opposition. 	
    But regardless, most analysts agree these changes will take some time.	
    Record or near record volume and open interest that have accompanied the
recent price slide are a strong indication that new shorts, not just longs
bailing out of unprofitable positions, were fueling the recent slide.	
    While the front month is technically very oversold and could bounce if short
sellers decide to take profits, the break today below the 2009 low of $2.409
essentially puts gas prices in uncharted territory, with little on the
fundamental side to justify a rally.	
	
 (Reporting By Joe Silha; Editing by David Gregorio)
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