NEW YORK (Reuters) - Natural gas futures ended lower on Tuesday, after two days of modest technical gains, as record-high supplies, mild early spring weather and expectations for a weekly inventory build on Thursday weighed on prices.
Mild weather this month has sharply slowed overall demand and weakened cash prices relative to futures despite declines in gas drilling, output cuts by some producers and unexpected nuclear plant outages that have helped tighten the market.
AccuWeather.com expects temperatures in the Northeast and Midwest, key gas-consuming regions, to mostly average above normal for the next two weeks, with daytime highs, at times, climbing above 70 degrees Fahrenheit.
Front-month gas futures on the New York Mercantile Exchange finished down 1.6 cents at $2.335 per million British thermal units after trading in a narrow range between $2.318 and $2.369. Gas prices have lost about 11 percent this month.
Pax Saunders, analyst at Gelber & Associates in Houston, said recent price action could look like a technical bottom, but he added, “It’s difficult to imagine that we’ve seen a seasonal low with ... an end-of-March storage level likely near 2.4 tcf and no substantive production constraints on the table.”
Traders said expectations for the year’s first weekly storage build on Thursday were also pressuring prices, noting mild March weather could mean that the injection, or stock building season, will start about two weeks earlier than usual.
U.S. Energy Information Administration data last week showed domestic gas inventories fell to 2.369 trillion cubic feet, still a record for this time of year after one of the mildest winters ever slowed demand.
(Storage graphic: link.reuters.com/mup44s)
Traders agreed some record high temperatures last week, particularly in the Midwest, could lead to the year’s first weekly storage injection.
Estimates for this week’s EIA report range from a draw of 2 bcf to a build of 16 bcf, with most looking for a 10-bcf gain. Stocks fell an adjusted 20 bcf in the same week last year, while the five-year average decline for that week is 17 bcf.
Inventories are likely to finish the month at an all-time high over 2.4 tcf, about 55 percent above normal and well above the previous March 31 record of 2.148 tcf set in 1983.
The cushion could also spell more trouble for prices late in the April-through-October stock-building season if storage caverns fill to capacity and force more supply into the market.
Cheap gas has helped tighten the supply-demand balance this year as manufacturers use more of the fuel and utilities switch from pricier coal to gas to generate power.
Nuclear plant outages have also been running above normal over the last month or so, adding as much as 1 billion cubic feet, or 1.5 percent, to potential daily gas demand. Gas is the fuel typically used to make up any lost nuclear generation.
On the supply side, low prices have slowed dry gas drilling and forced output cuts by several producers, which could trim 1 bcf or more from daily output.
But traders have mostly shrugged off signs that the market has been tightening, driving the nearby contract to a 10-year low of $2.204 last week.
With production still at or near all-time peaks and inventories set to end March at a record high, few traders expect much upside until summer cooling loads pick up.
Gas prices last Friday showed no reaction to Baker Hughes data indicating the gas-directed rig count fell for the 10th straight week to 663, its lowest in nearly 10 years.
Producers keep slowing dry gas drilling operations in the face of historically low prices, but the slowdown has yet to be reflected in pipeline flows.
Most analysts, noting it will be difficult to balance the gas market without serious production cuts, expect no major slowdown in gas output until later this year.
Some say the gas-directed rig count may have to drop below 600 to reduce flowing supplies significantly, with the producer shift to higher-value oil and gas liquids plays still producing plenty of associated gas that partly offsets any reductions in pure dry gas output.
Reporting By Joe Silha; editing by Jim Marshall