April 3, 2012 / 8:26 PM / 8 years ago

Natural gas futures end up for second day

NEW YORK (Reuters) - Natural gas futures ended higher on Tuesday for a second day as cooler extended weather forecasts and more technical buying after last week’s sell-off propped up prices despite concerns about record-high supplies.

Traders work on the floor of the New York Mercantile Exchange (NYMEX) March 28, 2007. REUTERS/Shannon Stapleton

Gas prices slid nearly 7 percent last week in the biggest weekly loss in two months as moderate weather and bearish data on inventories, production and drilling pressured the market.

Front-month gas futures on the New York Mercantile Exchange finished 3.5 cents, or 1.6 percent, higher at $2.187 per million British thermal units after trading between $2.117 and $2.204.

“The rally so far this week can only be categorized as minor and corrective, not a change in the underlying structure of the market which remains in a long-term downtrend,” Energy Management Institute’s Dominick Chirichella said.

He noted prices have garnered support this week from cooler forecasts and some book squaring ahead of a holiday weekend.

NYMEX floor trading will be closed on Friday for the Good Friday holiday.

Chart traders said the market was oversold and due for a technical bounce, but most remained skeptical of any upside, with storage and production at record highs and mild spring weather likely to further dampen demand.

Front-month futures, which tumbled 19 percent in March in their biggest monthly drop since August 2010, dipped to a 10-year low of $2.069 on Monday before settling higher.

Without warmer weather to kick up the air-conditioning load or concrete signs that production is slowing, many traders expect gas prices to continue to set new lows.

AccuWeather.com expects temperatures in the Northeast and Midwest, key gas-consuming regions, to average above normal for the next week, with daytime highs frequently topping 60 degrees Fahrenheit (15.6 Celsius).

Traders noted warm temperatures in Texas and across the South this week have stirred some air conditioning use.

While extended forecasts for the Midwest and East have turned cooler, traders said normal or below-normal readings in mid-April may not be cool enough to generate much load.

WHEN WILL PRODUCTION SLOW?

Baker Hughes data on Friday showed the gas-directed rig count rose last week for the first time in 12 weeks. The count hit a 10-year low of 652 the prior week.

(Rig graphic: r.reuters.com/dyb62s )

The steady drop in dry gas drilling this year — the gas rig count is still down nearly 30 percent since peaking at 936 in mid-October — had stirred expectations that low prices would finally force producers to curb gas output and tighten supplies.

But the drop has yet to be reflected in pipeline flows, which are still estimated to be at or near record highs, primarily due to rising output from shale.

Horizontal rigs, the type most often used to extract oil or gas from shale, are still hovering near all-time highs.

While the share of horizontals drilling for dry gas has fallen to 38 percent from 78 percent just two years ago, analysts say any slowdown in gas production could take a lot more time. They note that the shift to higher-value oil and liquids-rich wells still produces plenty of associated gas that ends up in the market after processing.

U.S. Energy Information Administration production data last week offered little hope for the bulls, with January gross gas output climbing to a record of 72.85 billion cubic feet per day, eclipsing the previous peak of 72.68 bcfd in November.

Some analysts say the gas-directed rig count may have to drop below 600 to reduce flowing supplies significantly. Most do not expect any major slowdown in gas output until later this year.

RECORD STORAGE, ANOTHER PROBLEM FOR PRICES

EIA data last week showed gas inventories rose for a second week to 2.437 trillion cubic feet.

(Storage graphic: link.reuters.com/mup44s )

The 57 bcf build, the largest ever for March, drove stocks further into record territory for this time of year and sharply widened the already huge surpluses to a year earlier and the five-year average.

Utilities typically build inventories from April through October to help meet peak winter heating needs.

Builds this year have started about two weeks earlier than usual, and storage is set to finish the month near 2.5 tcf, about 60 percent, or a whopping 950 bcf, above normal and easily above the previous March 31 record of 2.148 tcf from 1983.

Injection estimates for Thursday’s EIA report range from 10 bcf to 46 bcf, with most in the low or mid 30s. Stocks dropped an adjusted 29 bcf during the same week last year, while the five-year average build for that week is 8 bcf.

The inventory overhang could drive prices lower this spring as seasonal weather demand fades, then pressure prices again later in the injection season if storage caverns fill to capacity and force more gas into a well-supplied market.

Reporting By Joe Silha; Editing by Bob Burgdorfer and Jim Marshall

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