July 16, 2012 / 1:53 PM / 7 years ago

UPDATE 3-US natgas futures end lower despite early week heat

* Hot weather moderates slightly to pressure prices
    * Early week heat in Northeast, Midwest limits downside
    * Technical traders see market as range bound
    * Record inventories, high production concern bulls
    * Coming Up: Reuters weekly natgas storage poll on Wednesday

 (Releads, adds quote, updates with closing prices)
    By Joe Silha
    NEW YORK, July 16 (Reuters) - U.S. natural gas futures ended
lower on Monday, pressured by milder Northeast and Midwest
weather forecasts for later this week despite heat early in the
week that should force more homeowners and businesses to crank
up air conditioners.
    "The weather is moving toward another round of (heat) over
major portions of the U.S. but (it) will not last as long as the
last bout nor will (it) cover as much of the U.S. as the last
round," Energy Management Institute's Dominick Chirichella said
in a report.     
    The supply/demand balance for gas has tightened this year
since prices hit a 10-year low of $1.90 per mmBtu, prompting
many electric utilities to switch from coal to cheaper gas to
generate power.
    But as record heat this summer helped drive prices up more
than 50 percent to near the $3 mark, traders said gas had lost
its competitive edge and some utilities could switch back to
coal, which would slow overall gas usage.
    Front-month gas futures on the New York Mercantile
Exchange ended down 7.3 cents, or 2.5 percent, at $2.801 per
million British thermal units, after trading between $2.781 and
$2.915. The front contract hit a six-month high of $3.06 two
weeks ago, but did not breach the $3 mark last week.
    Chartists noted that the market has been in a technical
trading range for nearly three weeks, mostly seesawing between
support in the $2.70s and resistance in the $2.90s.
    After a hot start to the week, private forecaster
AccuWeather.com expects temperatures in the Northeast and
Midwest, key gas consuming regions, to moderate to just slightly
above normal before warming again early next week.
    Despite a string of below-average storage builds this summer
due to heat, inventories are still at record highs for this time
and well above last year and the five-year average.    

    Last week's storage report from the EIA showed that total
U.S. gas inventories for the week ended July 6 rose by 33
billion cubic feet to 3.135 trillion cubic feet. 
    The weekly injection - well below market expectations -
trimmed the surplus to last year by 54 bcf to 548 bcf, or 21
percent above the same week in 2011. It also sliced 57 bcf from
the excess versus the five-year average, reducing that surplus
to 516 bcf, or 20 percent above average.     
    (Storage graphic: link.reuters.com/mup44s)    
    Weekly builds have fallen below the seasonal norm for 11
straight weeks and have helped pull the surplus to last year
down by 38 percent from late-March highs. Traders expect that
trend to continue in the next two reports.
    Injection estimates for Thursday's EIA report range from 13
bcf to 46 bcf, with most in the low-30s. Stocks rose an adjusted
67 bcf during the same week last year, while the five-year
average increase for that week is 74 bcf.
    But total storage stands at about 76 percent full, a level
not normally reached until the first week of September.
Producing-region stocks are at 84 percent of estimated capacity.
    The storage surplus to last year must be cut by at least
another 300 bcf to avoid breaching the government's 4.1-tcf
estimate of total capacity. Stocks peaked last year in November
at a record 3.852 tcf. EIA estimates that gas storage will climb
to a record 4.002 tcf by the end of October.
    Concerns remain that the storage overhang could still drive
prices to new lows later this summer as storage caverns fill.   

    While gross U.S. gas production has slowed slightly from
January's record highs, output is still flowing at near all-time
peaks despite sharp declines in dry gas drilling.
    Data from Baker Hughes on Friday showed the gas-directed rig
count fell by 20 last week to 522, the seventh decline in eight
weeks and the lowest count since August 1999. ID:nL2E8IDCPR]
    (Rig graphic: r.reuters.com/dyb62s )
    A 44 percent drop in dry gas drilling in the last nine
months has stirred expectations that producers were getting
serious about stemming the flood of record gas supplies.
    But horizontal rigs, the type most often used to extract oil
or gas from shale, while down slightly last week to 1,166, are
not far below the all-time high of 1,193 hit seven weeks ago.
    Drillers this year have shifted rigs away from dry gas
operations 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.    
    The U.S. Energy Information Administration last week said it
expected marketed gas production in 2012 to rise by 4.2 percent
to a record 68.98 billion cubic feet per day, easily beating
last year's record of 66.22 bcfd. 

 (Reporting By Joe Silha; Editing by Bob Burgdorfer and David
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