November 7, 2012 / 3:16 PM / 5 years ago

UPDATE 3-Milder weather forecast drives US natgas futures lower

* Traders shrug off near-term cold, focus on milder outlook
    * Record high storage, production also weigh on sentiment
    * Nuclear power plant outages remain high, limit downside
    * Coming up: EIA, Enerdata natgas storage data Thursday

 (Releads, adds analyst quote, updates prices)
    By Joe Silha
    NEW YORK, Nov 7 (Reuters) - U.S. natural gas futures ended
lower on Wednesday as milder weather forecasts for later this
week and early next week weighed on prices despite chilly
near-term temperatures that have stirred more heating demand.
    "It looks like the weather forecasts are trending bearish,
so prices were down a little, but cash has been holding up
pretty well, and people are expecting a light inventory build
(on Thursday)," said Steve Mosley at SMC Advisory Services.
    Traders noted that nuclear plant outages this week were
still running well above last year and the five-year average and
have lent some support to gas prices as chilly temperatures
forced homeowners and businesses to crank up the heat.
    Plants burning gas are typically used to replace any lost
nuclear generation.
    But many traders expect any move up in prices to be
difficult without sustained cold to boost demand, with storage 
at all-time highs and production at or near a record peak.
    Front-month gas futures on the New York Mercantile
Exchange ended down 3.9 cents, or 1.1 percent, at $3.578 per
million British thermal units after trading between $3.555 and
$3.617. The nearby contract hit a one-year high of $3.82 early
last week.
    After another day or two of cold, expects
temperatures in the Northeast and Midwest, key gas consuming
regions, to moderate to above normal later this week and early
next week as daytime highs climb into the high-50s or low-60s
Fahrenheit, levels that should slow overall demand. 
    Some traders also 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.     
    Traders and analysts were waiting for the next U.S. Energy
Information Administration storage report on Thursday, with most
expecting stocks to have gained 27 billion cubic feet last week,
according to a Reuters poll on Wednesday. 
    Stocks rose an adjusted 48 bcf during the same week last
year. The five-year average increase for that week is 36 bcf.
    EIA data last week showed that domestic gas inventories for
the week ended Oct. 26 had climbed to 3.908 trillion cubic feet,
easily eclipsing the previous record high of 3.852 tcf hit last
    (Storage graphic: )          
    Based on recent weather forecasts, traders expect storage to
peak just shy of 3.95 tcf before winter withdrawals begin.
    Traders said this week's inventory number was difficult to
peg, noting Hurricane 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 bcf per day. Power outages on
Wednesday had fallen to about 650,000. 
    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 will provide a comfortable cushion to meet any
winter spikes in demand or unexpected disruptions in supply.

    In its November short-term energy outlook on Tuesday, the
EIA said it expected marketed gas production in 2013 to match
2012's record high estimated at 68.84 bcf per day. That was a
downward revision from the agency's previous 2013 estimate of
69.22 bcfd.
    EIA lowered its estimate for consumption next year,
expecting demand to slip by 0.47 bcf per day, or 0.7 percent,
from 2012 to 69.28 bcf daily. Expected declines in the electric
power sector due to higher gas prices should offset gains in
residential, commercial and industrial use. 
    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: )
    The associated gas produced from more-profitable shale oil
and shale gas liquids wells has kept dry gas flowing at or near
a record pace. And new pipeline capacity scheduled in some
bottlenecked shale plays later this year could prompt producers
to hook up more wells and add even more gas to supply.

 (Additional reporting by Eileen Houlihan)

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