NEW YORK (Reuters) - U.S. natural gas futures fell to near 10-year lows on Thursday after a government report showed a smaller-than-expected decline in weekly inventories.
The U.S. Energy Information Administration report showed total domestic gas inventories fell last week by 80 billion cubic feet to 2.433 trillion cubic feet.
With production still running at or near all-time highs and inventories set to end a very mild winter at a record high, gas prices have been on the defensive, falling 15 percent this month and nearly 25 percent since the beginning of the year.
And the slide may not be over.
There are still concerns storage ratchets, or contractual obligations, could force some to cycle gas out of inventory to meet minimum seasonal turnover requirements before March 31.
That could flood the market with even more supply, though some traders note reports that storage operators were showing some flexibility in end-winter inventory targets.
Front-month gas futures on the New York Mercantile Exchange finished down 3 cents, or 1.3 percent, at $2.272 per million British thermal units after slipping to a six-week low of $2.235 after the EIA report, barely above the 10-year low of $2.231 hit in late January.
“Weather is a lot milder than last year, so prices are drifting lower to find more coal-to-gas switching,” said Anthony Yuen, strategist at Citigroup in New York.
Cheap gas prices have led to a modest tightening in the gas market this year, helped by rising industrial use and more utility fuel switching away from more expensive coal.
Late-winter nuclear plant outages have been running well above normal and also helped boost daily gas demand.
EIA does expect gas consumption growth this year, primarily from power generators, to slightly exceed gains in production but probably not enough to balance an over supplied gas market.
With winter winding down, traders said expectations were growing that gas prices could soon break to new lows unless weather demand grows.
AccuWeather.com forecast temperatures in the Northeast and Midwest, key gas-consuming regions, to average above normal for the next two weeks, with daytime highs frequently topping 60 degrees Fahrenheit (15.6 Celsius).
The weekly inventory draw was below the Reuters poll estimate of 84 bcf and well below the five-year average drop for that week of 92 bcf.
It did slightly trim the surplus to last year, but stocks remain at a record high for this time of year and stand more than 700 bcf, or over 40 percent, above both last year and the five-year average.
(Storage graphic: link.reuters.com/mup44s)
Early withdrawal estimates for next week’s EIA report range from 35 bcf to 72 bcf versus last year’s adjusted drop of 60 bcf and the five-year average decline for that week of 79 bcf.
Stocks are expected to end winter at an all-time high above 2.2 tcf, well above the previous record of 2.148 tcf from 1983.
Traders said the huge overhang could drive prices lower this spring as weather demand fades, and could pressure prices again late in the April-through-October stock-building season if storage caverns fill to capacity and force more supply into an already-glutted market.
Planned output cuts by producers could trim 1 bcf per day or more from flowing supply, but analysts note that so far the cuts have not been reflected in pipeline flows.
Most analysts, noting it will be difficult to balance the gas market without serious production cuts, do not expect any major slowdown in gas output until late this year.
Traders were waiting for the next Baker Hughes drilling rig report on Friday after last week’s data showed the gas count slid to its lowest level since August 2009. It was the eighth straight weekly decline and stirred more talk that low prices were finally forcing drillers to slow dry gas operations.
But many analysts and traders remained skeptical that output will drop enough to significantly reduce supplies.
EIA offered little hope for the bulls on Tuesday when it raised its estimate for marketed gas production growth this year for a second straight month.
EIA expects 2012 gas output to be up 2.6 percent to a record high 67.91 bcfd despite the slide in drilling and planned cuts by some key producers that have been squeezed by low prices.
Analysts say it can take months for a slowdown in drilling to translate into lower production, noting the producer shift in spending to higher-value oil and gas liquids plays still produces plenty of associated gas that partly offsets any reductions in dry gas output.
Reporting By Joe Silha; Editing by John Picinich