* Front-month futures hit 2-1/2-mth high on light storage
estimate
* Production cuts, coal switching help tighten balance
* Moderate weather this week seen slowing demand
* Coming up: EIA, Enerdata natural gas storage data Thursday
(Releads, adds quote, technicals, updates with closing prices)
By Joe Silha
NEW YORK, May 16 (Reuters) – U.S. natural gas futures ended
higher on Wednesday for a second day, with supportive supply and
demand fundamentals and expectations for another light weekly
inventory build driving the front-month contract to a
2-1/2-month high.
Signs of a tighter market have helped drive front-month gas
prices to higher settles in seven of the last eight sessions, up
about 15 percent. Prices hit a 2-1/2 month high of $2.62 per
million British thermal units in late trade, up sharply from the
10-year low of $1.90 in mid-April.
Traders noted that production cuts by several producers
might finally be slowing record output, while demand has been
picking up as more electric utilities switch to gas from more
expensive coal to generate power.
Technical analysts noted that prices have broken some key
resistance levels in recent weeks. Some said the market was due
for a pullback, noting the relative strength index was hovering
in overbought territory above 70.
“The current rally has been driven by a combination of
increases in consumption (mostly from coal to gas switching) and
some production cuts. This has resulted in this year’s injection
season underperforming versus last year and the five year
average,” EMI’s Dominick Chirichella said in a report.
“The main key to the current rally will be if the surplus of
gas in inventory continues to narrow as we head into the summer
cooling season,” he added.
Front-month gas futures on the New York Mercantile
Exchange ended up 11.8 cents, or nearly 5 percent, at $2.618 per
million British thermal units. The rally in gas futures has come
when most other commodities, particularly energy contracts, have
been hammered by fears of a global economic slowdown.
But traders said prices could be reaching levels that will
slow or even reverse utility fuel switching, a big factor in
underpinning strong gas demand this year.
While most did not rule out another leg up once higher
temperatures boost air conditioning demand, many remained
skeptical in the near term with inventories and production still
at or near all-time highs.
STORAGE, STILL AT RECORD HIGHS
Four of the last five weekly inventory injections have come
in below average, raising expectations that lagging storage
builds will help trim record supplies to more manageable levels
in the 185 days or so left before winter withdrawals begin.
Strong utility demand should keep this week’s storage
injection numbers, due on Thursday, well below average again.
Traders and analysts polled by Reuters expecting stocks to have
gained 55 billion cubic feet last week, a build that would again
cut the surplus to last year and the five-year average.
Storage rose an adjusted 86 bcf during the same week last
year. The five-year average increase for that week is 91 bcf.
While the surplus to last year is down 10 percent from its
late March peak, it still stands at about 800 billion cubic
feet, or 44 percent above year-ago, a huge cushion to offset any
weather-related spikes in demand or storm-related cuts in
supply.
U.S. Energy Information Administration (EIA) data last week
showed total domestic gas inventories climbed to 2.606 trillion
cubic feet, still a record high for this time.
Concerns persist that the inventory glut will drive prices
lower this spring as weather demand fades. Prices may be
pressured again this summer as storage caverns fill up. (Storage
graphic: http://link.reuters.com/mup44s)
Traders noted that the storage surplus to last year would
have to be trimmed by another 550 bcf to avoid breaching the
government’s 4.1 tcf estimate of total capacity. Stocks peaked
last year in November at a record high of 3.852 tcf.
PRODUCTION SLOWS BUT STILL NEAR RECORD
While the Baker Hughes gas-directed rig count fell last week
to a 10-year low, horizontal rigs, the type most often used to
extract oil or gas from shale, jumped to an all-time high.
Since peaking at 936 in October, the 36 percent drop in dry
gas drilling has raised expectations that producers were finally
getting serious about stemming the record flood of supplies.
But traders noted the shift away from dry gas to
higher-value shale oil and shale gas liquid plays still produces
plenty of associated gas that ends up in the market after
processing. That has slowed the overall drop in dry gas
output. (Rig graphic: http://r.reuters.com/dyb62s)
Production cuts announced so far by some producers could
trim as much as 1 bcf per day from total output, but EIA still
sees marketed gas production hitting a record high this year.
Recent EIA data showed gross gas production in February fell
slightly from January’s record high. The decline, only the
second in the last 12 months, stirred talk that production might
finally have peaked and be poised to slow.
(Additional reporting by Eileen Houlihan; Editing by David
Gregorio)
