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US natural gas futures near flat early, forecasts still mild

Wednesday, 10 Oct 2012 | 9:12 AM ET

NEW YORK, Oct 10 (Reuters) - U.S. natural gas futures were trading near flat early on Wednesday, with some follow-through buying after Tuesday's modest rally underpinning prices despite milder Northeast and Midwest weather forecasts for next week that should slow demand.

The front-month contract, which posted a 2012 high of $3.546 per million British thermal units early last week, has climbed 22 percent in a little over two weeks as traders anticipated a pick up in demand this week from the season's first cold snap.

While reports Tuesday that the 11- to 15-day weather model had turned colder drove prices up about 2 percent, traders noted that predictions out that far were notoriously unreliable and the changes cited were small, with fairly mild weather still expected for most of the nation for at least the next two weeks.

"Some short-lived cooler variability was added to the forecast during early next week from the Midwest to East. This comes in between surges of warmth for these same regions, which still dominate the pattern overall," private forecaster MDA EarthSat said in its morning report.

At 9 a.m. EDT (1300 GMT), front-month gas futures

on

the New York Mercantile Exchange were unchanged at $3.467 per mmBtu after trading between $3.456 and $3.511.

Nuclear plant outages have also lent some support to prices The roughly 20,000 megawatts of nuclear generation offline for maintenance this week have added about 600 million cubic feet, or nearly 1 percent, to daily gas demand, according to data from Thomson Reuters Analytics.

But despite recent gains, most fundamental traders remain skeptical of the upside, with inventories at record highs for this time of year, production at or near an all-time peak and milder temperatures expected to soon slow overall demand.

Competition from low-priced coal may also be weighing on sentiment. As gas prices pushed well above $3 over the last two weeks, they became less competitive with coal and may have prompted some utilities that were burning cheaper gas for power generation to switch back.

Most analysts agree gas prices need to be well below $3 this autumn to maintain switching demand. Loss of that demand, which helped prop up gas prices all summer, could force more gas into already-packed inventories.

There are also concerns that if gas prices move much higher, producers could opt to hook up wells that have been drilled but not flowing because gas prices below $3 were unattractive.

STORAGE BUILDS PICK UP

U.S. Energy Information Administration data last week showed that domestic gas inventories for the week ended Sept. 28 rose by 77 billion cubic feet to 3.653 trillion cubic feet.

(Storage graphic: )

At 86 percent full, storage is hovering at a level not normally reached until the last week of October and offers a huge cushion that can help offset any weather-related spikes in demand or supply disruptions from storms.

Injection estimates for Thursday's EIA report range from 75 bcf to 98 bcf, with most in the low or mid 80s. Stocks rose an adjusted 108 bcf during the same week last year, while the five-year average increase for that week is 84 bcf.

Inventories are still at record highs for this time of year and likely to end the stock-building season above last year's all-time peak of 3.852 tcf.

HIGH PRODUCTION

Drilling for natural gas has been in a near-steady decline for the last year, with the gas-directed rig count down some 53 percent since last October and posting a 13-year low just two weeks ago.

But so far, production has shown few, if any, signs of slowing.

(Rig graphic: )

While dry gas drilling has become largely uneconomical at current prices, gas produced from more-profitable shale oil and shale gas liquids wells has kept output near record highs.

(Reporting By Joe Silha)

((joe.silha@thomsonreuters.com)(+1 646 223 6071)(Reuters Messaging: joe.silha.reuters.com@reuters.net))

Keywords: MARKETS NYMEX/NATGAS