UPDATE 3-US natgas futures gain for 4th day, front posts 2012 high

Sat Sep 29, 2012 1:51am IST

* Cool extended weather outlook backs recent gains
    * Above average nuclear plant outages also lend support
    * Front-month futures gain nearly 19 pct in Sept

 (Releads, adds analyst quote, rig data, production data,
updates prices)
    By Joe Silha
    NEW YORK, Sept 28 (Reuters) - U.S. natural gas futures ended
higher on Friday for a fourth straight session, with the
front-month contract notching a 2012 high on cooler weather
forecasts for next month that should boost heating demand.
    After early pressure from profit taking, prices climbed late
even though data from the U.S. Energy Information Administration
that showed gas output rose in July in the lower 48 states.
    While extended forecasts show cooler weather slipping into
the Midwest and possibly the East in early or mid-October, many
traders and analysts remained skeptical of the upside with
storage and production still at or near record highs.
    "When you look at the fundamentals, it doesn't seem like
these prices will last. There are below average temperatures
expected by the middle of October which suggest more heating
load, but it's not anywhere near peak winter demand," said
Summit Energy analyst Eric Bickel in Kentucky.
    Front-month gas futures on the New York Mercantile
Exchange ended up 2.3 cents at $3.32 per million British thermal
units after climbing late to a 2012 high of $3.33.
    The front month is up 17 percent in the last four sessions.
It would be the biggest four-day gain in more than three months,
 but much of the increase occurred on Wednesday, when November
took over front position with a 20-cent premium to the expiring
October contract.
    For September, the nearby contract posted an 18.6 percent
rise, the biggest monthly gain in three years.      
    A third-quarter price gain of almost 18 percent was decent
but well short of the 33 percent spike in the previous quarter.
    The near-term forecast for the Northeast and Midwest looks
fairly mild, but AccuWeather.com expects temperatures to cool in
the second week of October, with overnight lows slipping to the
high 30s and low 40s Fahrenheit range.
    While above average nuclear plant outages have boosted gas
demand from electric utilities, traders said mild autumn
temperatures so far have slowed power loads and limited the
impact. Gas units are usually used to replace lost generation.
    Low-priced coal may limit the upside for gas prices. Some
traders said if gas prices push much further above $3, some
utilities that have been using gas for power generation could
switch back to coal. 
    That could force more gas into a well-supplied market.     
    Most analysts agreed gas prices need to stay well below $3
this autumn to maintain demand from utilities that have switched
to gas.
    
    RIGS DECLINE, PRODUCTION STUBBORNLY HIGH
    Baker Hughes data on Friday showed that the gas-directed rig
count slid by 19 this week to a new 13-year low of 435.
    The nearly steady decline in gas-directed drilling for the
last 11 months - the count is down 51 percent from its 2011 peak
of 936 in October - has raised expectations that producers were
finally set to slow record output.
    But so far, production shows few, if any, signs of slowing.
    (Rig graphic: r.reuters.com/dyb62s )
    While dry gas drilling has become largely uneconomical at
current prices, gas produced from more-profitable shale oil and
shale gas liquids wells has kept output stubbornly high.
    Energy Information Administration gross natural gas
production data on Friday showed that July output climbed 0.4
percent from June to 72.58 billion cubic feet per day, not far
below January's record high of 72.74 bcfd.

    STORAGE BUILDS PICK UP, STOCKS STILL AT RECORD
    Most traders viewed Thursday's weekly storage build of 80
bcf as bearish, noting it came in above the Reuters poll
estimate of 76 bcf and was the biggest weekly injection so far
this year.     
    The EIA report showed that gas stocks climbed last week to
3.576 trillion cubic feet, still a record high for this time.
    The weekly build cut the surplus relative to last year to
296 bcf, or 9 percent above the same week in 2011. It increased
the excess versus the five-year average for only the second time
in 22 weeks, raising that surplus to 282 bcf, or 9 percent.
   (Storage graphic: link.reuters.com/mup44s )       
    While record heat this summer trimmed a huge storage surplus
to last year by 67 percent from its late-March high, weekly
storage builds have picked up sharply as weather loads faded.
    Early injection estimates for next week's EIA report range
from 55 bcf to 81 bcf versus a year-earlier build of 101 bcf and
the five-year average increase for the week of 78 bcf.
    At 84 percent full, storage is hovering at a level not
normally reached until the third week of October and still
offers a huge cushion that can help offset any weather-related
spikes in demand or supply disruptions from storms.
    Gas inventories are still likely to end the stock-building
season above last year's all-time high of 3.852 tcf.

 (Additonal reporting by Eileen Houlihan; Editing by Dale Hudson
and David Gregorio)