February 24, 2012 / 2:51 PM / 8 years ago

UPDATE 3-Weather, supplies drive US natural gas futures lower

* Moderate U.S. weather forecasts pressure prices
    * Record-high production, storage also weigh on sentiment
    * Recent gas rig count declines, producer cuts limit
downside

 (Updates with closing prices, adds quote, Baker Hughes rig
data)	
    By Joe Silha	
    NEW YORK, Feb 24 (Reuters) - Front-month U.S. natural
gas futures ended lower on Friday for a second day as mild
winter weather forecasts and high supplies continued to pressure
prices despite signs that the market may be tightening.	
    Recent weekly inventory reports hint at a slightly tighter
supply-demand balance.	
    Traders note nuclear plant outages are running well above
normal for this time of year and could boost gas demand by as
much as 1 billion cubic feet per day, while recent production
cuts may be reducing flowing supplies by a similar amount.	
    But traders said a stubbornly-mild winter has slowed heating
demand and helped build a huge inventory overhang that could
keep gas prices on the defensive for much of this year.
    "Producers are making attempts to reduce production, and the
power industry has increased demand for gas, but weather
forecasts remain bearish," said Kyle Cooper, managing director
of research at IAF Advisors in Houston.	
    Front-month March gas futures on the New York
Mercantile Exchange, which expire on Monday, finished down 7.1
cents, or 2.7 percent, at $2.55 per million British thermal
units after trading between $2.512 and $2.635.	
    The near contract flirted with breaking through the 40-day
spot moving average over the last week, but so far has been
unable to close above it. The average on Friday was $2.655.	
    Front-month gas, which gained 8 percent last week, lost 5
percent this week despite planned output cuts by several key
producers and a steadily declining gas drilling rig count.
    	
    TRADERS SHRUG OFF DRILLING, STOCKS DATA	
    Gas prices on Friday did not react to Baker Hughes drilling
data showing the gas-directed rig count fell for the seventh
straight week to a 29-month low of 710. 	
    Producers continue to slow dry gas drilling operations in
the face of low prices, but their shift in spending to
higher-value oil and gas liquids plays still produces plenty of
associated gas that casts doubts about the impact on supply.	
    Buyers also failed to step in on Thursday after U.S. Energy
Information Administration data showed total domestic gas
inventories fell last week by a larger-than-expected 166 billion
cubic feet to 2.595 trillion cubic feet. 	
    The draw was well above the Reuters poll estimate of 158
bcf, and trimmed both the inventory surplus to last year and the
five-year average.	
    But storage is still at record highs for this time, standing
at 753 bcf, or 41 percent, above a year ago and 744 bcf, or 40
percent, above average, a huge cushion that can easily meet any
late-winter spike in demand.	
    (Storage graphic: link.reuters.com/mup44s )	
    A Reuters poll showed most analysts expect stocks to end the
heating season at an all-time high of 2.215 tcf, well above the
previous record of 2.148 tcf set in 1983, particularly with no
extreme cold on the horizon. That could push gas prices below
the 10-year low of $2.231 hit in late January.	
    AccuWeather.com expects temperatures in the Northeast and
Midwest, key gas-consuming regions, to mostly average above
normal for the next 10 days, with daytime highs, at times,
topping 50 degrees Fahrenheit (10 Celsius).	
    Early withdrawal estimates for next week's EIA report range
from 80 bcf to 104 bcf versus last year's adjusted drop of 85
bcf and the five-year average decline for that week of 118 bcf. 
      	
    One of the mildest winters on record has slowed average
storage draws by about 510 bcf, or 29 percent.	
    Last winter at this time, cold weather forced storage owners
to pull more than 2 tcf from inventory to help meet the surge in
heating demand, but this season, only about 1.3 tcf of storage
gas has been burned up, a 37 percent drop.    	
    The huge overhang could also spell trouble for prices late
in the summer stock-building season if storage caverns fill to
the limits of capacity and force more supply into the 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.  	
    	
    WHEN WILL PRODUCTION SLOW?    	
    Many traders remain skeptical of gas production cuts, noting
planned reductions so far were not enough to tighten a market
oversupplied by as much as 3 bcfd, or more than 4 percent.	
    The gas-directed rig count has fallen 24 percent since
peaking last year at 936 in October. The steep drop has stirred
talk that low gas prices, off nearly a third in the last four
months, might finally force producers to slow output.	
    (Drilling rig graphic: r.reuters.com/dyb62s)    	
    Chesapeake Energy, the nation's second largest gas
producer, reported Tuesday that it had curtailed about 1 bcf per
day of natural gas production. 	
    But in its earnings report, the company said it expects 2012
net natural gas production to average 2.65 bcf per day, down
only 100 million cfd, or 4 percent, from 2011.	
    In a report this week, Bernstein Research said the
gas-directed rig count would have to drop to about 600 before
they would be comfortable forecasting flat to falling
production.	
    While low gas price should attract more demand from
utilities and industry, most analysts agree it will be difficult
to balance the gas market without serious production cuts.	
    Most do not see any major slowdown in gas output until late
this year, noting the recent slowdown in drilling has not yet
been reflected in pipeline flows.	
	
 (Reporting By Joe Silha)
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