March 14, 2012 / 7:43 PM / 5 years ago

Front-month U.S. natural gas ends lower, weather weighs

NEW YORK (Reuters) - Front-month U.S. natural gas futures slid slightly on Wednesday but managed to remain above Tuesday's 10-year spot chart low as weaker crude, mild late-winter weather and swelling inventories all pressured prices.

But some traders, noting other months showed gains on the day, said long-term prices were showing signs of life as recent weakness that led to planned production cuts should encourage increased industrial demand.

"Though the near-term outlook appears negative for prices, longer-term, low prices in the U.S. should encourage increased industrial demand as industries like those involved in chemical production take advantage of the low price," optionsXpress analysts Mike Zarembski and Rob Kurzatkowski said in a market update.

Front-month April natural gas futures on the New York Mercantile Exchange slid 1.5 cents, or less than 1 percent, to settle at $2.284 per million British thermal units.

On Tuesday the contract slid to $2.204, the lowest price for a front month in just over 10 years.

But forward contracts ended higher on Wednesday, with the May contract rising 0.8 cent to finish at $2.416 and summer months gaining about 3 cents each.

While some traders waited for more direction from government storage data due out Thursday, most noted stocks remain more than 40 percent above last year's levels and nearly 50 percent above the five-year average after one of the mildest winters on record reduced demand nationwide. At the same time, prolific production from shale plays continued to swamp the market.

More mild weather is expected to keep the pressure on prices in the coming days.

In the cash market, gas bound for the NYMEX delivery point Henry Hub in Louisiana slid 2 cents on average to $2.13, its lowest mark since September 2009.

Early Hub cash deals also eased to about 15 cents under the front month contract from deals done late Tuesday at about a 9-cent discount.

Gas on the Transco pipeline at the New York City gate fell 4 cents to $2.22, also at its lowest price since September 2009, while Chicago gas was 1 cent lower at $2.11.

Temperatures in both key gas-consuming cities were seen in the low-60s to mid-70s degrees Fahrenheit for the next several days, according to the Weather Channel's weather.com.

The National Weather Service six- to 10-day outlook issued on Tuesday again called for above or much-above-normal readings for about the eastern two-thirds of the nation and below-normal readings only in the West.

STORAGE OVERHANG A PROBLEM FOR PRICES

Last week's gas storage report from the U.S. Energy Information Administration showed total domestic inventories fell to 2.433 trillion cubic feet, still at record highs for this time of year, and more than 700 bcf, or 44 percent, above last year and 792 bcf, or 48 percent, above the five-year average level.

(Storage graphic: link.reuters.com/mup44s)

Withdrawal estimates for this week's EIA report ranged from 45 bcf to 73 bcf, with most traders and analysts expecting data will show a draw of about 57 bcf when it is released early Thursday, a Reuters poll showed.

Stocks fell an adjusted 60 bcf in the same week last year, and on average over the past five years have dropped 79 bcf that week.

With no extreme cold on the horizon, stocks are likely to end winter at an all-time high of 2.2 tcf, well above the previous record of 2.148 tcf set in 1983.

The cushion could also spell trouble for prices late in the summer stock-building season if storage caverns fill to capacity and force more supply into the market.

OUTAGES, CUTS COULD HELP TIGHTEN MARKET

Nuclear plant outages were running at about 19,600 megawatts, or 20 percent, on Wednesday, up from 15,800 MW out a year ago and a five-year outage rate of about 15,200 MW. [ID:nL4E8EE6MX]

Traders said the outages could add more than 1 bcf to daily gas demand.

And planned output cuts by producers could trim 1 bcf per day or more from flowing supply.

Relatively cheap gas has also drawn more industrial use and prompted additional utility fuel switching away from more expensive coal.

But with production still running at or near all-time highs, few traders expect much upside in prices in the near term.

MORE FUNDAMENTALS

Baker Hughes drilling data last week showed the gas-directed rig count fell for a ninth straight week to a 32-month low of 670.

The steady drop in gas-directed drilling has stirred talk that low prices might finally slow output.

(Rig graphic: r.reuters.com/dyb62s)

Analysts agree 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.

A recent Bernstein report said the gas-directed rig count would have to drop to about 600 before it would be comfortable forecasting flat to falling production.

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.

Reporting by Eileen Houlihan and Edward McAllister; editing by Jim Marshall

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