* Short-covering lifts prices after front hits 10-year low
* Mild weather forecasts, high production limit upside
* Coming up: Reuters natgas storage poll Wednesday
(Releads, adds quote, closing prices)
By Joe Silha
NEW YORK, April 2 (Reuters) – U.S. natural gas futures ended
higher on Monday for the first time in six sessions, backed by
some short-covering after record-high supplies and tapering
spring demand drove the front-month contract to a 10-year low
early in the session.
Bearish data on inventories, production and drilling helped
push gas prices down nearly 7 percent last week, the biggest
weekly loss in two months.
But while chart traders said the market was oversold and due
for a technical bounce with the 14-day relative strength index
below 20, few expected much upside, with storage and production
still at record highs and mild spring weather slowing demand.
Front-month gas futures on the New York Mercantile
Exchange finished 2.6 cents, or 1.2 percent, higher at $2.152
per million British thermal units after sinking early to $2.069,
the lowest for the near contract since February 2002.
“This was just a little modest short-covering, and we could
see a little more tomorrow, but there’s not a lot of support in
the market. I think it’s highly probable that futures will trade
below $2 this month,” said Dominick Chirichella at Energy
Management Institute in New York, adding that forecasts of
slightly cooler weather may have triggered some of the buying.
Spreads to winter contracts continued to widen, with the
December premium to May gaining 3.3 cents to $1.088.
That spread spiked 50 percent last month as mild March
weather slowed demand and pressured front-month gas down 19
percent in its biggest monthly drop since August 2010.
Winter months garnered support from expectations that low
prices will finally slow record production and boost demand,
particularly from utilities switching away from pricier coal.
For the quarter, the lead contract logged its biggest drop
in two years, sliding some 29 percent.
Without warmer weather to kick up air-conditioning load or
concrete signs that production is slowing, many traders expect
gas prices to continue to set new lows.
AccuWeather.com expects temperatures in the Northeast and
Midwest, key gas-consuming regions, to average above normal for
the next week, with daytime highs frequently topping 60 degrees
Fahrenheit (15.6 Celsius).
Extended forecasts have turned a bit cooler, but traders
said below-normal readings in mid-April would not be enough to
generate much load, with average highs steadily rising now.
BULLS FACE PRODUCTION PROBLEM
Drilling data from Baker Hughes on Friday showed the
gas-directed rig count rose last week by six to 658 after
hitting a 10-year low of 652 the previous week. It marked the
first gain in the gas rig count in 12 weeks.
The relatively steady drop in dry gas drilling this year —
the gas count is down nearly 30 percent since peaking at 936 in
mid-October — has stirred expectations that low gas prices
would finally force producers to curb output and tighten
supplies. (Rig graphic: http://r.reuters.com/dyb62s )
But the drop has yet to be reflected in pipeline flows,
which are estimated to be at or near record highs, primarily due
to rising output from shale.
U.S. Energy Information Administration production data on
Thursday offered little hope for the bulls, with January gross
gas output climbing to a record of 72.85 billion cubic feet per
day, eclipsing the previous peak of 72.68 bcfd set in November.
The slight drop the agency reported for December, the first
measurable decline since well freeze-offs curbed production in
January and February 2011, had raised expectations that
producers were finally curtailing output.
Some analysts say the gas-directed rig count may have to
drop below 600 to reduce flowing supplies significantly, noting
the producer shift to higher-value oil and gas liquids plays
still produces plenty of associated gas that partly offsets any
reductions in pure dry gas output.
Most analysts do not expect any major slowdown in gas output
until later this year.
RECORD STORAGE, A PROBLEM FOR PRICES
EIA data last week showed gas inventories rose by 57 bcf to
2.437 trillion cubic feet.
(Storage graphic: http://link.reuters.com/mup44s)
The build, the second in 2012 and the largest ever in March,
drove stocks further into record territory for this time of year
and sharply widened the already-huge surpluses to a year earlier
and the five-year average.
Utilities typically build inventories from April through
October to help meet peak winter heating needs.
Builds this year have started about two weeks earlier than
usual, and storage is set to finish the month near 2.5 tcf,
about 950 bcf, or 60 percent, above normal and easily above the
previous March 31 record of 2.148 tcf from 1983.
Injection estimates for Thursday’s EIA report range from 30
bcf to 49 bcf, with most in the mid or high 30s. Stocks dropped
an adjusted 29 bcf during the same week last year, while the
five-year average build for that week is 8 bcf.
The inventory overhang could drive prices lower this spring
as seasonal weather demand fades, then pressure prices again
later in the injection season if storage caverns fill to
capacity and force more gas into a well-supplied market.
(Editing by Dale Hudson and Jim Marshall)
