UPDATE 3-US natural gas futures end down, first loss in 6 sessions

Thu Jul 26, 2012 1:34am IST

* Front month ends lower as longs take profits after recent
gains
    * Estimates for another light weekly storage build limit
downside
    * Still-warm forecasts for the next week also lend support
    * Record inventories, high production keep buyers cautious
    * Coming Up: EIA, Enerdata natgas storage data on Thursday

 (Releads, adds trader quote, technical, spread data, updates
prices)
    By Joe Silha
    NEW YORK, July 25 (Reuters) - U.S. natural gas futures ended
lower on Wednesday, pressured by profit taking after five
straight session gains and ahead of the front-month August
contract expiration on Friday.
    Gas prices had shot up 14 percent in the previous five
sessions, backed by warm weather forecasts that should slow
storage injections for at least the next two weeks. It was the
biggest five-day price run in more than a month.
    "The physical (cash) market has been very strong because of
all the heat, but we were bound to see some length get out,
particularly with (August) expiration coming up on Friday," a
Texas-based trader said.
    Bullish technicals have helped drive the complex higher.
    The chart picture for gas turned more bullish over the last
few weeks as prices powered through some key resistance points
like the 200-day moving average.
    But some technical analysts agreed the market was due for a
profit taking pullback, noting the 14-day relative strength
index had climbed well into overbought territory.
     Front-month August gas futures on the New York
Mercantile Exchange, which expire on Friday, ended down 11.7
cents, or 3.7 percent, at $3.07 per million British thermal
units after trading between $3.05 and $3.178. The nearby
contract hit a seven-month high of $3.196 on Tuesday.
    The price weakness up front widened spreads to winter months
for the first time in eight sessions, with the December premium
to August ending up 5.6 cents at 39.4 cents. That spread hit
33.8 cents on Tuesday, its narrowest in at least two years.
    Early this year, decade-low prices below $2 per mmBtu helped
tighten the supply/demand balance for gas by prompting many
utilities to switch from coal to cheaper gas to generate power.
    Record heat this summer, particularly in the Midwest but
also at times in the Northeast, lifted demand further and helped
drive gas prices up nearly 65 percent from spring lows.
    A string of light weekly inventory builds and expectations
for more of the same in coming weeks have also supported prices.
    Widespread heat has slowed storage builds for 12 straight
weeks and helped pull a record inventory surplus to year-ago
down nearly 43 percent from late-March highs.
    But many traders remain skeptical of the upside, noting peak
summer heat will be fading in the next few weeks and storage and
production are still at or near record highs.
    Some traders also caution that as gas prices push above the
$3 mark, many utilities that switched this year from coal to
cheaper gas to generate power could move back to coal.
    AccuWeather.com expects temperatures in the Northeast and
Midwest, key gas-consuming regions, to average above normal for
the next week, but highs mostly in the mid- or upper-80s
Fahrenheit will fall short of some recent extremes.

    ANOTHER BELOW-AVERAGE BUILD COMING
    Lagging storage builds this season have raised expectations
that record-high inventories can be trimmed to more manageable
levels in the 17 weeks left before winter withdrawals begin.
    A Reuters poll of industry traders and analysts on Wednesday
 showed most expected stocks to have gained 26 billion cubic
feet last week, a build that would again cut the inventory
surplus to last year and the five-year average. 
 
    Stocks rose an adjusted 48 bcf during the same week last
year. The five-year average increase for that week is 61 bcf.   
    EIA data last week showed that total U.S. gas inventories
for the week ended July 13 climbed to 3.163 trillion cubic feet,
about 77 percent full and a level not normally reached until
mid-September. 
    (Storage graphic: link.reuters.com/mup44s)    
    While the surpluses to year-ago and the five-year average
have declined, there's still 500 bcf more gas in inventory this
year than last year, a huge cushion that can help offset any
unexpected spikes in demand or disruptions in supply.
    The storage surplus to last year must be cut by at least
another 260 bcf to avoid breaching the government's 4.1-tcf
estimate of total capacity. Stocks peaked last year in November
at a record 3.852 tcf. EIA estimates that gas storage will climb
to 4.002 tcf by the end of October. 
    Concerns remain that the storage overhang could still drive
prices to new lows later this summer as storage caverns fill. 
              
    HIGH PRODUCTION 
    U.S. gas production has slowed slightly this year, but
output is still flowing near an all-time peak despite the steady
decline in dry gas drilling to 13-year lows. 
    (Baker Hughes rig graphic: r.reuters.com/dyb62s )
    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.
    Baker Hughes data last week showed that horizontal rigs, the
type used to extract oil or gas from shale, fell for a second
straight week. But the horizontal count at 1,164 is still not
far below the all-time high of 1,193 hit nine weeks ago.
    The shift to more horizontal drilling has slowed the overall
drop in dry gas output.

 (Reporting by Eileen Houlihan; Editing by John Picinich, Sofina
Mirza-Reid and Marguerita Choy)
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