NEW YORK (Reuters) - Natural gas futures ended lower on Monday for a third straight session, pressured by forecasts for mild U.S. weather the next two weeks that should slow overall demand and force more gas into already swollen inventories.
With summer heat winding down and storage and production still running at or near record highs for this time of year, many traders expect more downside, at least until cooler temperatures move in to stir up some heating demand.
Nuclear plant outages are running well above year-ago levels and could lend some support to gas prices - plants burning gas usually make up for missing nuclear generation - but traders said overall power loads have slowed as milder late-summer weather reduced the need for air conditioning.
"Though storage space fear has diminished, ample supplies, mild weather and a lack of shoulder month demand are still a drag on October (futures)," Gelber & Associates senior analyst Aaron Calder said in a report.
Front-month gas futures on the New York Mercantile Exchange ended down 7.8 cents, or 2.7 percent, at $2.865 per million British thermal units after trading between $2.856 and $2.983. The nearby contract has dropped 6.5 percent in the last three sessions.
On Thursday, the front month climbed to a five-week high of $3.07 before settling slightly lower on profit-taking.
Calder also noted that Central Appalachian coal prices have fallen to two-year lows at about $2.25, raising the possibility that some utilities that have been burning cheaper gas to generate power could switch back to coal.
A loss of that utility demand, which helped prop up gas prices this summer, could lead to bigger weekly storage builds and renew concerns about inventories climbing to near capacity before winter withdrawals begin.
AccuWeather.com expects temperatures in the Northeast and Midwest, key gas consuming regions, to vary on either side of normal for the next two weeks. Traders said highs mostly above 70 degrees Fahrenheit were not likely to generate much load.
Relative weakness up front widened spreads to winter months for a fourth day, with the January premium to October gaining 3.9 cents, or 7.6 percent, to close at 55.2 cents. That spread settled on Tuesday at 45.8 cents, its smallest in 2-1/2 months.
Data from Baker Hughes on Friday showed that the gas-directed rig count posted its 15th drop in 17 weeks, falling by four last week to 448, the lowest since June 1999.
The nearly steady decline in gas-directed drilling over the last 11 months - the count is down 52 percent since peaking at 936 in October - has fed expectations that producers were getting serious about stemming the flood of record supplies. But so far there is little evidence that gas output is slowing.
(Rig graphic: r.reuters.com/dyb62s )
Dry gas drilling has been largely uneconomical at current prices, but the gas produced from more-profitable shale oil and shale gas liquids wells is likely to keep gas production at a record high for a second straight year.
The U.S. Energy Information Administration last week said it expected marketed gas production in 2012 to hit a record for a second straight year, climbing 4 percent from 2011 levels to 68.86 bcf per day.
EIA data on Thursday showed that domestic gas inventories for the week ended September 7 climbed by 27 billion cubic feet to 3.429 trillion cubic feet, still a record high for this time of year.
It was the 19th time in the last 20 weeks that the build fell short of the seasonal norm.
(Storage graphic: link.reuters.com/mup44s)
But while record heat this summer helped cut a huge storage surplus to last year by more than 60 percent from its late-March peak near 900 bcf, traders noted that autumn injections are now poised to pick up as weather-demand fades.
At 81 percent full, stocks are hovering at levels not normally reached until the first week of October and still offer a huge cushion that can help offset any spikes in demand or Gulf Coast supply disruptions from storms.
Early injection estimates for Thursday's EIA report range from 62 bcf to 73 bcf versus a year-earlier build of 89 bcf and the five-year average increase for the week of 73 bcf.
Concerns remain that the inventory overhang will pressure prices this autumn if storage caverns fill to near capacity and back more natural gas onto the market.
Additional reporting by Eileen Houlihan; editing by Jim Marshall and Bob Burgdorfer