UPDATE 3-US July gas futures off highs but expire with gains
* Front-month gas hits highest mark since mid-January
* Broad-based heat stirs cooling load, drives gains
* Storm Debby cuts some production, dampens Southeast demand
* Coming Up: EIA, Enerdata natgas storage data Thursday (Releads, adds quote, spread data, updates closing prices)
By Joe Silha
NEW YORK, June 27 (Reuters) - U.S. natural gas futures ended higher on Wednesday for a fifth straight session, with warm U.S. forecasts for the next two weeks driving July to a 5-1/2 month high before profit-taking brought the contract off the intraday high ahead of expiration.
Gas prices have shot up more than 10 percent in the last five sessions. Heat has been the main factor driving prices higher this month in what has turned out to be a very warm, early start to the summer cooling season.
Private forecaster MDA EarthSat still expects widespread heat to blanket much of the United States for the next two weeks, with only some New England and West Coast states likely to see seasonal temperatures.
Concerns that Tropical Storm Debby had disrupted gas supplies also triggered buying early in the week, but the storm's impact on Gulf of Mexico gas production was minimal. Less than 5 billion cubic feet of output has been shut in since Friday, with no reports of serious damage to offshore producing facilities.
"The market rallied hard today, then sold off into the close on some profit taking. I think prices got a little overbought at higher levels," a New England-based trader said.
The front-month July gas futures contract on the New York Mercantile Exchange expired up 0.7 cent at $2.774 per million British thermal units after climbing early to $2.946, the highest for a nearby contract since mid-January.
Relative strength in the near contract narrowed spreads to winter for the fourth time in five sessions, with the December premium to July ending at 55.7 cents, down 3.3 cents from Tuesday and 35 percent below its peak this year of 86.1 cents set in mid-April.
While chart traders noted that Wednesday's run up drove the front month above the 200-day moving average for the first time in 11 months and could be viewed as bullish, some said Wednesday's relatively weak close could keep buyers cautious.
Strong utility demand for gas this year has helped tighten a loose supply-demand balance, as decade-low prices prompted some utilities to burn cheap gas rather than coal to generate power.
It has also helped slow weekly inventory builds to below average for eight straight weeks and pulled a huge stock surplus to last year down 23 percent from late-March highs.
But fundamental traders said as gas prices approach the $3 mark, utilities could start using more coal to generate power. They noted the NYMEX eastern coal to Henry Hub gas spread this week was pared to its narrowest in nearly a year, dipping below $1.10 per mmBtu (gas premium).
The spread does not include transportation costs.
MORE LIGHT STORAGE BUILDS AHEAD
Traders and analysts were waiting for the next weekly government report on U.S. natural gas inventories on Thursday.
A Reuters poll on Wednesday showed most were expecting stocks to have gained 52 billion cubic feet last week, a build that would again sharply cut the inventory surplus to last year and the five year average.
Storage builds have fallen below the seasonal norm for eight straight weeks. Traders, eyeing more strong weather-related demand ahead, expect that to continue for at least another two or three reports.
Data last week from the Energy Information Administration showed that total domestic gas inventories for the week ended June 15 rose by 62 bcf to 3.006 trillion cubic feet. It was the earliest ever that stocks climbed above 3 tcf.
The build trimmed the surplus to last year to 680 bcf, or 29 percent above the same week in 2011. It also reduced the excess versus the five-year average, cutting the total to 641 bcf, or 27 percent. (Storage graphic: link.reuters.com/mup44s)
While the inventory surplus to last year is down sharply in the last three months, traders note that total storage is already 73 percent full and hovering at a level not normally reached until late August. Producing-region stocks are at 83 percent of capacity.
The storage surplus to last year will have to be cut by at least another 435 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. The EIA expects gas storage to climb to a record 4.015 tcf by the end of October.
DEMAND UP, PRODUCTION GROWTH SLOWS
Gas demand picked up sharply this year as spring prices hit 10-year lows at $1.90 and prompted many utilities to use more gas-fired generators to produce power. But gas production is still flowing at near-record-high levels despite relatively low prices that have made many dry gas wells uneconomical.
Baker Hughes data on Friday showed the gas-directed rig count fell last week by 21 to 541, its eighth drop in nine weeks and the lowest since August 1999.
(Rig graphic: r.reuters.com/dyb62s )
A 42 percent drop in dry gas drilling in the last eight months has fed perceptions that producers are 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 which still produce plenty of associated gas that ends up in the market after processing. (Editing by Sofina Mirza-Reid and Jim Marshall)
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