January 20, 2012 / 9:09 PM / 8 years ago

UPDATE 3-US natgas snaps eight-day losing streak after 10-yr low

(Adds closing prices, quote, details)	
    * Front-month futures end higher after new 10-year low
    * Mild forecasts into early February limit upside
    * Record storage, production also weigh on sentiment

    By Joseph Silha	
    NEW YORK, Jan 20 (Reuters) - U.S. natural gas futures
ended higher on Friday for the first time in nine sessions,
backed by technical buying after prices slid some 24 percent in
eight trading days due to high supplies and what so far has been
one of the mildest winters on record.	
    Unusually mild winter weather has dramatically slowed demand
to heat homes and businesses, cutting consumption in December by
nearly 4 percent from the same year-ago month and driving
front-month futures this week to their lowest since February
    The recent slide was the steepest eight-day drop for the
front contract in six years, but chart watchers noted the market
was technically oversold and due for a bounce with the 14-day
relative strength index hovering at a 17-month low of about 10.	
    Strong volume and record open interest have accompanied the
recent price drop, indicating that new shorts, not just longs
dumping unprofitable positions, were fueling the downward move.	
    But while some shorts probably did cover positions on
Friday, propping up prices ahead of a cold weekend, there is
little on the fundamental side to sustain a rally.	
    "The shorts have ridden it a long way and probably took some
profits, particularly with some forecasters talking about a
possible cold front in February, but the fundamentals for gas
still look bad," said Steve Mosley at SMC Advisory Services.	
    Front-month gas futures prices on the New York
Mercantile Exchange settled 2.1 cents higher on Friday at $2.343
per million British thermal units after slipping overnight to a
new 10-year low of $2.283.	
    After a brief cold shot this weekend in the Northeast and
Midwest, key gas consuming regions, AccuWeather.com expects
temperatures in both regions to average above normal next week,
dimming chances for a weather-related rebound in the near term.	
    Private forecaster MDA EarthSat said Thursday that this
winter so far has been the fourth warmest on record, with
February also looking fairly mild, at least for the southern and
eastern parts of the United States.
    Last year gas prices were mostly weighed down by record high
gas production, primarily from shale.	
    But after a mild November and December, focus has gradually
shifted to a potentially bigger problem for prices -- the huge
inventory surplus that has been building relative to last year
and the five-year average as demand fell well short of the norm.	
    Since U.S. gas inventories peaked in mid-November at a
record high 3.852 trillion cubic feet, just 562 billion cubic
feet has been pulled from storage, or 37 percent below the
five-year average of 895 bcf for that period.	
    Total gas inventories are still at a record high for this
time of year, standing 20 percent above the same week last year,
and 21 percent, above the five-year average. 	
    With no extreme cold on the horizon, inventory draws for the
next few weeks are expected to remain relatively light, which
should further balloon the surplus.	
    Most analysts now expect inventories to end the heating
season at about 2.1 tcf, 35 percent above the average of 1.550
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 late in the spring and summer stock building season
if storage operators run out of room to stockpile gas and back
more of it into an already oversupplied 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.	
    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.	
    Data from Baker Hughes, an oil services firm in Houston, on
Friday showed the gas-directed rig count fell to a 25-month low
of 780, solidly below the 800 levels some analysts say is needed
to cut output and tighten supplies. 	
    The recent slowdown in dry gas drilling has stirred talk
that low prices might finally lead to a slowdown in production.
    But with more productive shale drilling techniques and
plenty of associated gas produced by oil and gas-liquids wells, 
most analysts do not expect any major slowdown in dry gas output
until later this year at the earliest.	
  INVENTORY GRAPHIC         link.reuters.com/mup44s  	
  ACCUWEATHER:              www.accuweather.com/   	
  NWS MAP:                  link.reuters.com/pev87r   	
  RIG GRAPHIC               r.reuters.com/dyb62s	
    More fuel switching by utilities and industry to gas from
costlier fuels such as oil and coal could eventually yield more
    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
excess supply.	
    But a government report on Thursday showing gas prices could
rise significantly if export plans are realized could stir
political opposition and stall export projects. 	
    Regardless, most analysts agree any changes on the demand
side of the equation will take some time.	
 (Reporting By Joe Silha)
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