NEW YORK (Reuters) - U.S. natural gas futures slid nearly 2 percent by midday Tuesday, pressured along with cash prices for a third straight session despite the return of weekday industrial demand after the U.S. Memorial Day holiday.
Hot weather early this week in consuming regions was expected to ease slightly by late or next week, curbing air conditioning loads, but traders noted some warmer weather was again on tap for longer-term outlooks.
"The updated weather forecasts point to ample cooling demand for the weeks ahead, with our model continuing to translate that into below-average storage injections that will continue to reduce the year-on-five-year average storage surplus," said Citi Futures Perspective energy analyst, Tim Evans.
As of 12:15 p.m. EDT, front-month June natural gas futures on the New York Mercantile Exchange, which expire later Tuesday, were at $2.522 per million British thermal units, down 4.6 cents, or nearly 2 percent.
The front month hit a 3-1/2 month high of $2.759 on May 18 before losing more than 6 percent last week, its biggest weekly decline in two months.
But since posting a 10-year low of $1.902 in late April, nearby futures are still up about 32 percent on signs that record production is finally slowing and demand picking up as more electric utilities switch from coal to cheaper gas for power generation.
In the cash market, gas bound for the NYMEX delivery point Henry Hub in Louisiana was heard at $2.50, down 6 cents from Friday's $2.56 average.
Early Hub cash deals, however, firmed to just 1 cent under the front month contract, from deals done late Friday at a 3-cent discount.
Gas on the Transco pipeline at the New York City gate was heard near $2.73, also down 6 cents from Friday's average of $2.79.
U.S. Energy Information Administration data last week showed domestic gas inventories rose to 2.744 trillion cubic feet.
(Storage graphic: link.reuters.com/mup44s)
The weekly build trimmed the surplus to last year to 750 bcf, or 38 percent, and cut the excess versus the five-year average to 753 bcf, or 38 percent.
The surplus to last year has dropped 15 percent from late-March highs, but traders noted stocks remain at record highs for this time of year. Concerns remain that the glut will drive prices lower this summer as storage caverns fill.
Weekly inventory builds have fallen below average in six of the last seven weeks, but traders said more undersized builds will be needed to trim the overhang to more manageable levels in the 175 days or so left before winter withdrawals begin.
The storage surplus to last year will have to be cut by at least another 500 bcf to avoid breaching the government's 4.1-tcf estimate of capacity. Stocks peaked last year in November at a record high of 3.852 tcf.
Early injection estimates for this week's EIA report range from 59 bcf to 90 bcf versus last year's adjusted build of 89 bcf and the five-year average increase for that week of 100 bcf.
Despite declines in dry gas drilling and planned output cuts by several key producers, gas production is still flowing at near-record highs.
Announced cuts so far have slowed output by less than 1 bcf per day, or just a little over 1 percent, not enough to make a real dent in a seriously oversupplied gas market.
Baker Hughes data last week showed the gas-directed rig count fell by six to a 10-year low of 594. The near 37 percent drop in dry gas drilling since peaking at 936 in October has stirred talk that producers were finally getting serious about stemming the flood of supplies.
But the shift away from dry gas to higher-value shale oil and shale gas liquid plays still produces plenty of associated gas that ends up in the market after processing. That has slowed the overall drop in dry gas output.
(Rig graphic: r.reuters.com/dyb62s)
The National Weather Service's six- to 10-day outlook issued on Monday called for above-normal readings for much of the mid-Continent and normal or below-normal readings on both coasts.
Nuclear power plant outages were running at about 16,000 megawatts, or 16 percent, on Tuesday, down from about 20,400 MW out a year ago but up from a five-year outage rate of about 12,700 MW. [ID:nL4E8GT5AZ]
Reporting by Eileen Houlihan; Editing by John Picinich and Sofina Mirza-Reid