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UPDATE 3-U.S. natgas futures end up, front hits 2-1/2-yr high

Monday, 23 Dec 2013 | 3:54 PM ET

(New throughout, adds analyst quote, spread data; updates prices)

NEW YORK, Dec 23 (Reuters) - U.S. natural gas futures ended higher on Monday, with forecasts for the return of cold weather and expectations for more strong withdrawals from inventory driving the front-month contract to its highest since July 2011.

Chilly winter weather so far, which triggered strong demand for heating and burned up a lot of gas in inventory, has helped push the market up for seven straight weeks since Nov. 1, with the front contract gaining some 27 percent during that period.

The steady move up has broken some key technical resistance along the way and turned the chart picture bullish. But some traders said the market was overbought and due for a profit-taking pullback.

"We got some more upside from the weather forecast," said Steve Mosley at The SMC Report in Arkansas. "The temperature forecasts are still looking supportive."

Mosley also noted that gas prices above the $4.50 per mmBtu mark could trigger some hedge selling by gas producers.

NYMEX will close early on Tuesday at 1:30 p.m. EST (1830) GMT) due to the Christmas holiday on Wednesday.

Front-month gas futures on the New York Mercantile Exchange ended up 4.5 cents, or 1 percent, at $4.463 per million British thermal units after climbing overnight to $4.532, its highest since July 2011.

Traders noted the premium of the March 2014 gas futures over the April contract on Monday climbed another 3 cents, or nearly 11 percent, to 30.8 cents, its widest in eight months.

Last week, that spread shot up more than 50 percent to 27.8 cents as more cold weather sparked gains in winter months that continued to outpace spring contracts.

After a mild start to the week, particularly in the Northeast, forecaster MDA Weather Services said it expects much colder temperatures to dominate most of the country for at least the next two weeks.

The consistent chill in November and December weather has led to storage draws that have more than doubled the norm for that period and prompted analysts to scale back end-winter inventory estimates.

U.S. Energy Information Administration data last week showed total natural gas inventories fell by a record 285 billion cubic feet, eclipsing the previous benchmark drop of 274 bcf, set in January 2008.

Total stockpiles stand at 3.248 trillion cubic feet, 488 bcf, or 13 percent, below last year, and 261 bcf, or 7 percent, below the five-year average.

This Friday's EIA report is likely to show another above-average drawdown, with early estimates ranging from 149 bcf to 177 bcf. Stocks fell just 74 bcf during the same week last year, while five-year average decline for the week is 125 bcf.

The report will be delayed one day this week due to the Christmas holiday on Wednesday.

If drawdowns for the rest of the heating season match the five-year average, storage would end winter below 1.5 tcf. That would be the lowest end winter inventory since 2008 and could help prop up prices next year as utilities scramble to rebuild stocks for next heating season.

In the ICE cash market, prices for Tuesday delivery at Henry Hub <GT-HH-IDX>, the benchmark supply point in Louisiana, climbed 17 cents to $4.52, with late differentials firming to 2 cents over NYMEX from a 12-cent discount on Friday.

Gas on the Transco pipeline at the New York citygate <E-TSCO6NY-IDX> jumped $1.16 to $4.64 on the cold midweek outlook. Chicago <MC-CHICIT-IDX> was 16 cents higher at $4.91.

For daily ICE U.S. cash gas prices, click <0#GAS-IDX=ICE>.

(Reporting by Eileen O'Grady, Julia Edwards and Joe Silha; Editing by Nick Zieminski, Alden Bentley, Bob Burgdorfer and Leslie Gevirtz)