August 7, 2012 / 1:57 PM / 5 years ago

UPDATE 3-U.S. natural gas futures end up for second day

* Front futures end higher for a second day
    * Extended forecasts revised warmer again
    * Coming Up: Reuters natural gas inventory poll on Wednesday


    By Joe Silha
    NEW YORK, Aug 7 (Reuters) - U.S. natural gas futures ended
higher on Tuesday for a second straight day, backed by buying
ahead of Thursday's weekly inventory report and slightly warmer
revisions to extended weather forecasts.
    Gas demand perked up this year after prices in the spring
slid to 10-year lows below $2 per mmBtu and prompted many
utilities to switch from coal to cheaper gas to generate power.
    Then widespread heat this summer lifted demand further and
helped slow weekly inventory builds to below average for 14
straight weeks, pulling a huge inventory surplus down some 47
percent from late March highs.    
    "I think we moved up today ahead of the (EIA) storage
number, which should be low relative to the five-year average,
and weather still looks supportive from a power generation
perspective," said Eric Bickel, analyst at Summit Energy.
    Front-month gas futures on the New York Mercantile
Exchange ended up 5.6 cents, or 1.9 percent, at $2.964 per
million British thermal units after trading between $$2.882 and
$2.995.
    Chart traders said the market had gotten oversold and was
due for a bounce after a four-day slide late last week drove
prices down by more than 10 percent.
    They noted that the front contract on Monday tested and held
support at the 40-day moving average, a sign the down move might
be over, at least temporarily. But most agreed the contract
needed to close above $3 to set the stage for more upside.
    Some traders said that as gas prices push above $3, some
utilities could move back to coal, slowing overall gas usage and
raising the possibility of bigger weekly storage injections.
    Many remained skeptical of further upside, with peak summer
heat likely to fade in a few weeks, and storage and production
still running at or near record highs.
    Private forecaster Commodity Weather Group, in its morning
report, noted that both the 6-10 day and 11-15 day forecasts
turned warmer overnight.
    
    PRODUCTION HOLDS NEAR RECORD
    In its Short-term Energy Outlook (STEO) on Tuesday, the U.S.
Energy Information Administration trimmed its estimate for
domestic natural gas production growth in 2012, but still
expects output to be up 3.8 percent from 2011's record levels.
 
    The agency said it expected marketed natural gas production
in 2012 to rise by 2.5 billion cubic feet per day to a record
68.72 bcfd, down slightly from its July outlook that had output
this year at 68.98 bcf daily.
    EIA did say, however, that it expects a small drop in
production in coming months, reflecting losses from possible
hurricanes and declines related to the recent rig count slide.
    Data from Baker Hughes on Friday showed the gas-directed rig
count fell last week by seven to 498, the 10th drop in 11 weeks
and the lowest count since late July 1999.

    Dry gas drilling has become largely uneconomical at current
prices, and a 47 percent drop in the gas rig count over the last
nine months has fed expectations that producers were getting
serious about slowing record output.
    But drillers have moved 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.    
    Baker Hughes also reported that horizontal rigs, the type
used to extract oil or gas from shale, rose for the first time
in four weeks, gaining four to 1,155. The horizontal count is
down just 3 percent from the record high of 1,193 set in May.
    
    STORAGE ALSO AT RECORD 
    Data last week from the EIA showed that domestic gas
inventories for the week ended July 27 climbed to 3.217 trillion
cubic feet, still a record high for that time of year. 

    Despite the steady decline in the storage surplus to last
year and the five-year average, total stocks stand at about 78
percent full, a level not normally reached until mid-September.
Producing-region stocks are at 83 percent of estimated capacity.
    Concerns remain that excess storage gas could drive prices
to new lows later this summer if inventories climb to levels
that would test the government's 4.1-tcf estimate of capacity.
    EIA on Tuesday revised its estimate for end of October gas
in storage to 3.954 tcf from a previous 4.002 tcf estimate.
    Injection estimates for Thursday's EIA report range from 23
bcf to 38 bcf, with most in the 30 bcf area. Stocks rose an
adjusted 31 bcf during the same week last year, while the
five-year average increase for that week is 45 bcf.

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