* Milder weather this week pressures futures
* Production cuts, coal switching help limit downside
* Coming Up: Reuters weekly natgas storage poll Wednesday
(Releads, adds quote, EIA data, Reuters poll data, updates
prices)
By Joe Silha
NEW YORK, May 8 (Reuters) – U.S. natural gas futures lost
ground on Tuesday, pressured by moderate weather this week that
has slowed demand, but signs that the market may be tightening
continued to limit the downside.
Traders said the supply-demand balance for gas seemed to be
tightening, with record production finally showing signs of
slowing and demand picking up as utilities push to switch from
coal to cheaper gas to generate power.
The result has been a series of fairly light weekly
inventory builds even as moderate spring weather has slowed
overall demand.
The U.S. Energy Information Administration on Tuesday
slightly trimmed its estimate for domestic natural gas
production growth in 2012, but sharply raised its expectation
for demand gains this year.
At 1:45 p.m. EDT (1745 GMT), front-month gas futures
on the New York Mercantile Exchange were down 3 cents, or 1.3
percent, at $2.306 per million British thermal units, after
trading between $2.276 and $2.348.
“We’re losing a little weather demand this week, so we’re
off a little, but the market seems to be well supported in the
$2.30 area,” a Pennsylvania-based trader said.
The nearby contract, which hit a 10-year low of $1.90 about
three weeks ago, had settled higher in five of seven previous
sessions, gaining about 15 percent.
But technical traders noted that upside progress seemed
stalled, with the market unable to break above the six-week high
of $2.385 hit early last week despite several attempts.
Many traders remained skeptical of the upside with storage
and production at or near all-time highs, but most did not rule
out another leg higher once hotter temperatures force homeowners
and businesses to crank up their air conditioners.
INVENTORY GLUT, A PROBLEM FOR BULLS
Last week’s Energy Information Administration storage report
for the week ended April 27 showed total gas inventories climbed
to 2.576 trillion cubic feet, still a record high for this time.
(Storage graphic: http://link.reuters.com/mup44s)
While the inventory surplus to last year has dropped 5
percent from the highs in late March, traders said the market
was still a long way from eliminating a huge oversupply that
still stands at about 850 billion cubic feet, or 50 percent,
above both last year and the five-year average.
Concerns persist that the storage overhang will force prices
lower this spring as weather demand fades, then pressure prices
again this summer if storage caverns fill and force more gas
into the market.
Early injection estimates for Thursday’s EIA report range
from 25 to 55 bcf versus last year’s adjusted build of 71 bcf
and the five-year average increase for that week of 84 bcf.
A Reuters poll on Tuesday showed industry analysts expect
storage to top out this year at 4.109 tcf, in line with a
government estimate for peak capacity.
But lagging storage builds have raised expectations that
excess supplies can be trimmed to manageable levels in the 190
days or so left before winter withdrawals begin.
IS PRODUCTION SLOWING?
EIA on Tuesday slightly trimmed its estimate for marketed
gas production growth in 2012 but still sees output at a record
high 69.14 bcfd.
The agency significantly raised its estimate for gas
consumption this year, expecting demand to climb 3.4 bcfd, or
5.1 percent, from 2011 to 70.17 bcf daily, driven mostly by an
expected 21 percent jump in electric power demand as low prices
encourage utilities to use the cheaper fuel to generate power.
The nearly steady drop in dry gas drilling — the gas rig
count is off 35 percent since peaking at 936 in October — has
also raised expectations that producers were finally getting
serious about stemming the flood of supplies.
(Rig graphic: http://r.reuters.com/dyb62s)
Low prices have prompted several producers to say they will
cut spending on dry gas plays or shut in some output, but so far
the reductions have not significantly slowed pipeline flows.
EIA data last week showed gross gas production in February
fell 420 million cubic feet per day, or 0.6 percent, from
January’s record high. The decline, only the second in the last
12 months, stirred talk that domestic production might finally
have peaked and be poised for a slowdown.
While cheap gas has tightened the supply-demand balance this
year as manufacturers and utilities use more of the fuel, most
analysts agree it will be difficult for prices to move much
higher without clear signs that production is slowing.
(Reporting By Joe Silha; Editing by Marguerita Choy)
