* Futures hit 7-month high early, then slip on profit taking
* Still-warm forecasts for this week help limit downside
* Record inventories, high production keep buyers cautious
(Releads, adds analyst comment, updates prices)
By Joe Silha
NEW YORK, July 23 (Reuters) – U.S. natural gas futures,
pressured by profit taking after an early run to a seven-month
high, slipped slightly on Monday, but still-warm forecasts for
the Northeast and Midwest helped limit the downside.
Coal-to-gas switching and widespread heat this summer has
kicked up utility demand for gas. That has slowed storage builds
to below average for 12 straight weeks and helped pull a record
inventory surplus to year-ago down some 38 percent from its
late-March highs.
It has also helped drive gas prices up more than 60 percent
since hitting a 10-year low of $1.90 per mmBtu back in April.
At 12:45 p.m. EDT (1645 GMT), front-month gas futures
on the New York Mercantile Exchange were down 1 cent at $3.071
per million British thermal units after climbing early to a
seven-month high of $3.13.
“This (run up) is definitely a response to the warm weather.
It looks like this summer could turn out to be the third hottest
since 1950,” said BNP Paribas analyst Teri Viswanath, noting gas
has also had a good technical move to the upside.
Technical traders agreed the chart picture for gas has
turned more bullish over the last week or so, noting the front
month broke some key resistance during its 10 percent gain in
the previous three sessions.
But some said the market was due for a profit taking
pullback, noting the 14-day relative strength index, an
indicator of underlying market momentum, climbed early Monday
into very overbought territory above 80 percent.
Many traders remain skeptical of further upside, noting peak
summer heat will be over in a few weeks and inventories and
production are still hovering at or near record highs.
Some also caution that as gas prices push well above the $3
mark, many utilities that switched this year from coal to
cheaper gas to generate power could move back to coal.
NYMEX eastern coal is still trading at about a $1 per mmBtu
discount to Henry Hub natural gas, according to Reuters data.
But estimated transport costs for coal of about $1 would bring
the differential to about flat.
AccuWeather.com expected temperatures in the Northeast and
Midwest, key gas-consuming regions, to mostly average above
normal this week, with highs in the mid- or upper-80s Fahrenheit
range at times topping 90 degrees.
ANOTHER BELOW-AVERAGE BUILD EXPECTED
Lagging storage builds this season have raised expectations
that record-high storage can be trimmed to more manageable
levels in the 17 weeks left before winter withdrawals begin.
Early injection estimates for Thursday’s Energy Information
Administration storage report range from 19 billion to 50
billion cubic feet versus last year’s build of 48 bcf and the
five-year average increase for the week of 61 bcf.
EIA data last week showed that total U.S. gas inventories
for the week ended July 13 climbed to 3.163 trillion cubic feet,
about 77 percent full and a level not normally reached until
mid-September.
The weekly build again trimmed both the surplus to last year
and the five year average, but there’s about 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 due to storms.
(Storage graphic: http://link.reuters.com/mup44s)
Concerns remain that the storage overhang could still drive
prices to new lows later this summer as storage caverns fill.
The storage surplus to last year must be cut by at least
another 260 bcf to avoid breaching the government’s 4.1-tcf
estimate of total capacity. Stocks peaked last year in November
at a record 3.852 tcf. EIA estimates that gas storage will climb
to 4.002 tcf by the end of October.
STILL-HIGH PRODUCTION
While traders said U.S. gas production has slowed slightly
this year, they note that output is still flowing at near an
all-time peak despite a steady decline in dry gas drilling.
Data from Baker Hughes on Friday showed the gas-directed
rig count fell by four to 518, the eighth decline in nine weeks
and the lowest count since August 1999.
(Rig graphic: http://r.reuters.com/dyb62s )
A 45 percent drop in dry gas drilling in the last nine
months has fed expectations that producers were getting serious
about stemming the flood of record gas supplies.
Dry gas drilling has become largely uneconomical at current
prices, but drillers have been moving 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.
Baker Hughes also reported that horizontal rigs, the type
often used to extract oil or gas from shale, fell for the second
week, dropping two to 1,164. But the horizontal count is still
not far below the all-time high of 1,193 hit nine weeks ago.
The shift to more horizontal drilling has slowed the overall
drop in dry gas output.
(Reporting By Joe Silha; Editing by Phil Berlowitz)
