June 5, 2012 / 1:56 PM / 5 years ago

UPDATE 3-Weather support lifts US natgas futures for 2nd day

 * Warm weather headed for key Northeast, Midwest regions
 * Storage, production data last week prop up prices
 * Coming Up: Reuters weekly natgas storage poll Wednesday

 (Releads, adds quote, spread data, updates with closing prices)	
 By Joe Silha	
 NEW YORK, June 5 (Reuters) - U.S. natural gas futures ended
higher on Tuesday for the second straight day, underpinned by
tighter supply and demand fundamentals and forecasts for warm
weather in the Northeast and Midwest later this week and next
week.	
 The weather forecasts, particularly for the Northeast, will
likely boost air conditioning demand. That plus bullish
supply-side data last week on production, drilling and storage,
had some traders expecting prices to be relatively
well-supported at current levels.	
 But upside price moves may be limited in the near term as
inventories remain at record highs for this time of year and
monthly production has hovered just below an all-time peak.	
 "We saw a little follow-through buying from  yesterday. The
weather for the eastern part of the country looks pretty warm,
at least for the next two weeks," a Pennsylvania trader said.	
 Front-month gas futures on the New York Mercantile
Exchange ended up 3.1 cents, or 1.3 percent, at $2.446 per
million British thermal units after trading between $2.383 and
$2.477. The nearby contract has gained 5.2 percent so far this
week after losing 9.4 percent last week.	
 Strength in the front contract narrowed spreads to winter
months for a third day, with the December premium to July ending
Monday at 72 cents, down 0.9 cent from Friday and 16 percent
below its peak this year of 86.1 cents hit in mid-April.	
 Gas demand picked up sharply this year as prices slid to
10-year lows and prompted electric utilities to switch from coal
to cheaper gas for power generation.	
 But as prices rose to a 3-1/2 month high of $2.759 in
mid-May, some traders said the move up had made gas less
competitive and could prompt some utilities to switch back to
coal.	
 After a cool start to the week, AccuWeather.com expects
temperatures in the Northeast and Midwest, key gas consuming
regions, to warm to above normal later this week and most of
next week, with highs rising above 80 degrees Fahrenheit (27
degrees Celsius).    	
	
 LAGGING STORAGE BUILDS	
 Strong utility demand for gas has slowed inventory builds to
below average in seven of eight previous weeks, with more
below-average injections expected in at least the next two
reports.	
 U.S. Energy Information Administration data last week showed
natural gas inventories for the week ended May 25 rose by 71
billion cubic feet to 2.815 trillion cubic feet. 	
 While the build was in line with market expectations -- the
Reuters poll estimate was looking for a 70-bcf gain -- traders
noted it was well below average for this time and again cut the
surplus relative to last year and the five-year average.	
 The surplus to last year was trimmed by 18 bcf to 732 bcf,
or 35 percent above the same week in 2011. The relatively light
weekly build also cut 29 bcf from the excess versus the
five-year average, reducing the total to 724 bcf, or 35 percent.	
 The storage surplus to last year has dropped 17 percent from
late-March highs, but traders noted stocks remain at record
highs for this time.	
 While most traders still expect stocks to end the injection
season above last November's record of 3.852 tcf, some note that
the steady stream of below-average builds has helped dampen
concerns about storage reaching congestion before next winter.	
 (Storage graphic: link.reuters.com/mup44s)	
 The storage surplus to last year still has to be cut by at
least another 480 bcf to avoid breaching the government's
4.1-tcf estimate of capacity.	
 Injection estimates for Thursday's EIA report range from 45
bcf to 75 bcf, with most in the mid-50s. Stocks rose an adjusted
81 bcf during the same week last year, while the five-year
average increase for that week is 99 bcf.	
 	
 SIGNS OF SLOWING PRODUCTION	
 Traders noted recent declines in dry gas drilling and
planned output cuts by several key producers finally seemed to
be taking a toll on gas production.	
 Energy Information Administration data last week showed
gross gas production in March fell for a second straight month,
dropping 260 million cubic feet per day, or 0.4 percent, from
downwardly revised February output. 	
 Output hit a record high 72.74 billion cubic feet per day in
January but recent declines -- output has fallen three times in
the last four monthly reports -- have stirred talk that low
prices were finally forcing more producers to slow output.	
 But analysts said that the cuts so far were not enough to
significantly reduce supplies, noting production in 2012 was
still expected to set a record high for a second straight year.	
 Baker Hughes data on Friday showed the gas-directed rig
count fell last week for the fifth time in six weeks, dropping
by six to a 12-1/2 year low of 588.	
 The 37 percent drop in dry gas drilling since peaking at 936
in October has also raised expectations that producers were
finally getting serious about stemming the flood of supplies.	
 The Baker Hughes report also showed that horizontal rigs,
the type often used to extract oil or gas from shale, fell for a
second straight week, but the count at 1,183 is still just below
the all-time high of 1,193 set two weeks ago.
 The shift away from dry gas to higher-value shale oil and
shale gas liquid plays still produces plenty of associated gas
that ends up in the market after processing. That has slowed the
overall drop in dry gas output. 	
 (Rig graphic: r.reuters.com/dyb62s ) 	
	
 (Additional reporting by Eileen Houlihan; editing by Jim
Marshall)	
 

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