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

UPDATE 3-US natural gas futures end down again

* Front-month futures end down after Tuesday's 7-1/2-month
high
    * Some extended weather forecasts turn milder
    * Record inventories, high production keep buyers cautious
    * Coming Up: EIA, Enerdata natgas storage reports on
Thursday

 (Releads, adds trader quote, spread data, updates prices)
    By Joe Silha
    NEW YORK, Aug 1 (Reuters) - U.S. natural gas futures ended
lower on Wednesday on more profit taking after setting a
7-1/2-month high early the previous session and reports that
some private forecasters had moderated their mid-August
temperature outlooks.
    It was the second day of losses for gas, which also closed
lower on Tuesday after the earlier run up.
    Hot weather was still forecast this week and next for the
Midwest, but traders said the milder turn in the mid-month
outlook, particularly for northern states, triggered selling.
    "The market is correcting after the recent gains, and I
think the heat is already priced in, so some people may be
looking a little farther out," a Pennsylvania-based trader said,
referring to the milder revisions to the 15-day forecast.
    Front-month gas futures on the New York Mercantile
Exchange ended down 3.8 cents, or 1.2 percent, at $3.171 per
million British thermal units after trading between $3.123 and
$3.241.
    Spreads to winter months narrowed for a third day, with the
December premium to September easing 0.1 cent to 36.9 cents.
That spread hit 34.8 cents early last week, its narrowest in at
least two years.    
    Decade-low prices below $2 per mmBtu this spring tightened 
the supply/demand balance for gas by prompting many electric
utilities to switch from coal to gas for power generation.
    Then record heat this summer, particularly in the Midwest
but also at times in the East, increased demand to help drive
gas prices up nearly 70 percent from the spring lows.        
    The front contract, which posted a 7-1/2-month high of
$3.277 on Tuesday, gained nearly 14 percent in July, backed by
scorching temperatures that kicked up air conditioning loads and
slowed weekly inventory builds.
    Private forecaster MDA EarthSat noted the 11-15 day outlook
for northern tier states turned cooler, while the Midwest and
South were still expected to see mostly above normal readings.
    Despite recent price gains, many traders remain skeptical of
the upside, noting peak summer heat is likely to fade in the
next few weeks and storage and production are still at or near
record highs.
    Traders also caution that, as gas prices push above $3, many
utilities that opted this year to use gas for power generation
could move back to coal, further slowing usage.        

    ANOTHER LIGHT WEEKLY BUILD
    Data last week from the Energy Information Administration
showed that gas inventories for the week ended July 20 climbed
to 3.189 trillion cubic feet, a record for this time of year and
a level not normally reached until mid-September. 
     
    Weekly inventory builds have fallen below the seasonal norm
for 13 straight weeks and are likely to do so again in
Thursday's EIA report, with traders and analysts polled by
Reuters expecting stocks to have increased by 23 billion cubic
feet last week. 
    Storage rose an adjusted 43 bcf in the same week last year,
while the five-year average increase for the week is 56 bcf.
    While both the surplus to last year and the five-year
average have been declining, there is still almost 500 bcf more
gas in inventory this year than last year, a huge cushion that
can help offset any weather-related spikes in demand or Gulf
Coast supply disruptions from storms.
    (Storage graphic: link.reuters.com/mup44s)    
    Concerns remain that the storage overhang 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.
    The EIA estimates that gas storage will climb to 4.002 tcf
by the end of October.       
    
    HIGH PRODUCTION
    The EIA's gross gas production report on Tuesday showed that
May output was unchanged from April at 72.39 bcf per day, just
shy of January's record of 72.74 bcfd. 
    Traders have been looking for signs that relatively low gas
prices might finally slow record output, but production is still
at 3 bcfd, or 4.3 percent, above the same year-ago month.
    (Rig graphic: r.reuters.com/dyb62s )
    Dry gas drilling has become largely uneconomical at current
prices, and a 46 percent drop in the gas rig count over the last
nine months to a 13-year low 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.    

 (Reporting By Joe Silha; Editing by Bob Burgdorfer and Alden
Bentley)
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