July 2, 2012 / 1:23 PM / 5 years ago

US gas futures slip 3 pct early despite more heat

* Front-month well below last week's 5-1/2 month high
    * Hot weather still on tap in six to 10-day outlooks
    * Recent storage data, drilling rig data supportive
    * Coming Up: API oil data Tuesday, EIA oil data Thursday

    By Eileen Houlihan
    NEW YORK, July 2 (Reuters) - U.S. natural gas futures slid nearly 3 percent
early Monday, falling with weaker crude futures despite continued heat across
much of the nation.
    Last week nearby futures rose to a 5-1/2 month spot chart high in what has
become a scorching start to summer.
    Continued widespread heat was expected over most of the nation for the next
two weeks.
    In addition, recent inventory data - below average for a ninth straight week
- and drilling rig data have remained supportive.
     As of 9:15 a.m. EDT (1315 GMT), front-month August natural gas futures on
the New York Mercantile Exchange were at $2.751 per million British
thermal units, down 7.3 cent, or near 3 percent. Last week the front month
contract traded as high as $2.946, its highest mark since early January.
    Some traders remained concerned that a move close to $3 would again reduce
the appeal of gas over coal for power generation. 
    Since posting a 10-year low of $1.902 twice in late April, nearby futures
are up about 45 percent on signs that record production was finally slowing and
demand picking up as more electric utilities switched from coal to gas.
    
    ANOTHER BELOW-AVERAGE BUILD, 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.
    Early injection estimates for this week's EIA report range from 38 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 on Friday 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.
    
    MORE FUNDAMENTALS
    The National Weather Service's 6- to 10-day outlook issued on Sunday called
for above-normal readings for nearly the entire nation, with normal or
below-normal readings only in Florida, parts of the Midwest and a small piece of
Texas.
    Nuclear power plant outages were running at about 9,500 megawatts, or 9
percent, on Monday, up from 5,000 MW a year ago and a five-year outage rate of
just 4,500 MW. 
    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 Nov. 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)

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