US natural gas futures near flat early, forecasts still mild

NEW YORK, Oct 10 (Reuters) - U.S. natural gas futures weretrading near flat early on Wednesday, with some follow-throughbuying after Tuesday's modest rally underpinning prices despitemilder Northeast and Midwest weather forecasts for next weekthat should slow demand.

The front-month contract, which posted a 2012 high of $3.546per million British thermal units early last week, has climbed22 percent in a little over two weeks as traders anticipated apick up in demand this week from the season's first cold snap.

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

"Some short-lived cooler variability was added to theforecast during early next week from the Midwest to East. Thiscomes in between surges of warmth for these same regions, whichstill dominate the pattern overall," private forecaster MDAEarthSat said in its morning report.

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


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

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

But despite recent gains, most fundamental traders remainskeptical of the upside, with inventories at record highs forthis time of year, production at or near an all-time peak andmilder temperatures expected to soon slow overall demand.

Competition from low-priced coal may also be weighing onsentiment. As gas prices pushed well above $3 over the last twoweeks, they became less competitive with coal and may haveprompted some utilities that were burning cheaper gas for powergeneration to switch back.

Most analysts agree gas prices need to be well below $3 thisautumn to maintain switching demand. Loss of that demand, whichhelped prop up gas prices all summer, could force more gas intoalready-packed inventories.

There are also concerns that if gas prices move much higher,producers could opt to hook up wells that have been drilled butnot flowing because gas prices below $3 were unattractive.


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

(Storage graphic:)

At 86 percent full, storage is hovering at a level notnormally reached until the last week of October and offers ahuge cushion that can help offset any weather-related spikes indemand or supply disruptions from storms.

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

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


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

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

(Rig graphic:)

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

(Reporting By Joe Silha)

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