NEW YORK U.S. natural gas futures edged higher in early post-holiday trading on Thursday, boosted to their highest level in six months as more hot weather on tap for much of the nation lifts air conditioning demand.
But traders expect little more upside, with prices hovering above the 200-day moving average near $2.82 per million British thermal units and most noting the market will have a hard time breaking the $3 level, where gas loses its appeal over coal for power generation.
As of 9:30 a.m. EDT (1330 GMT), front-month August natural gas futures on the New York Mercantile Exchange were at $2.93 per mmBtu, up 3.1 cents, or 1 percent, after trading as high as $2.957, the highest mark for a front month since early January, according to Reuters data.
NYMEX was closed Wednesday for the U.S. Independence Day holiday.
Since posting a 10-year low of $1.902 twice in late April, nearby futures are up about 53 percent on signs that record production was finally slowing and demand picking up as more electric utilities switched from coal to gas.
In the cash market, gas bound for the NYMEX delivery point Henry Hub in Louisiana was heard early at $2.89 on volume near 585 million cubic feet, up 11 cents from Tuesday's average of $2.78.
Early Hub cash deals were done at a 1-cent premium to the front month contract, firming slightly from deals done late Tuesday about even with the front month.
Gas on the Transco pipeline at the New York citygate was heard early near $3.26 on volume near 335 mmcf, up 26 cents from Tuesday's average of $3.
BELOW-AVERAGE BUILDS, BUT STILL BLOATED INVENTORIES
Last week's gas storage report from the U.S. Energy Information Administration showed total domestic gas inventories rose by 57 billion cubic feet to 3.063 trillion cubic feet.
The build, while above Reuters poll estimates for a 52 bcf gain, fell well short of last year's gain of 84 bcf and the five-year average increase for that week of 85 bcf. It was the ninth straight week the build was below average.
Lagging storage builds this season have raised expectations that record-high inventories can be trimmed to more manageable levels in the 20 weeks left before winter withdrawals begin.
The weekly injection trimmed the surplus to last year to 653 bcf, or 27 percent, and sliced the excess versus the five-year average to 613 bcf, or 25 percent.
(Storage graphic: link.reuters.com/mup44s)
Total storage is already 75 percent full and hovering at a level not normally reached until late August. Producing-region stocks are at 84 percent of estimated capacity.
Concerns remain that the storage overhang could still drive prices to new lows this summer as storage caverns fill.
The storage surplus to last year will have to be cut by at least another 405 bcf to avoid breaching the government's 4.1-tcf estimate of total capacity.
Injection estimates for this week's EIA report, which will be delayed one day until Friday due to the U.S. Independence Day holiday on Wednesday, range from 37 bcf to 55 bcf versus last year's build of 90 bcf and the five-year average increase for the week of 79 bcf.
Stocks peaked last year in November at a record 3.852 tcf. The EIA expects gas storage to climb to a record 4.015 tcf by the end of October.
DEMAND UP, PRODUCTION GROWTH SLOWS
Gas demand picked up sharply this year as spring prices hit 10-year lows and prompted many utilities to use more gas-fired generation to produce power. But gas production is still flowing at near-record-high levels despite relatively low prices that have made many dry gas wells uneconomical.
EIA's gross gas production report on Friday showed that April output rose 0.8 percent from March to 72.48 bcf per day, just shy of January's record of 72.74 bcf daily.
But data from Baker Hughes last week showed the gas-directed rig count fell to 534, its ninth drop in 10 weeks and its lowest level since August 1999.
(Rig graphic: r.reuters.com/dyb62s)
Horizontal rigs, the type most often used to extract oil or gas from shale, however, rose for a second straight week, and at 1,171 are just shy of the record high 1,193 hit six weeks ago.
A 43 percent drop in dry gas drilling in the last eight months has stirred expectations that producers are getting serious about stemming the flood of record gas supplies.
Dry gas drilling has become largely uneconomical at current prices, but drillers have been moving rigs to more profitable shale oil and shale gas liquid plays that still produce plenty of associated gas that ends up in the market after processing.
That has slowed the overall drop in dry gas output.
The National Weather Service's 6- to 10-day outlook issued on Wednesday called for above-normal readings for much of the western half of the nation and along the Gulf Coast of Texas, with normal readings in the Mid-Continent and below-normal readings in the Northeast and Southeast.
Nuclear power plant outages were running at about 8,800 megawatts, or 9 percent, on Thursday, up from 4,700 MW out a year ago and a five-year outage rate of just 4,100 MW. [ID:nL3E8I536G]
The U.S. National Hurricane Center said tropical cyclone formation was not expected over the next 48 hours. The Atlantic hurricane season runs from June 1 through November 30.
The latest government statistics show the Gulf of Mexico accounts for 6 percent of U.S. gas production and just over 20 percent of U.S. oil production.
(Reporting by Eileen Houlihan, editing by Dave Zimmerman)