July 26, 2012 / 1:32 PM / 6 years ago

UPDATE 3-US natural gas futures end up, 6th gain in 7 sessions

 * Front month futures end up in seesaw trade
 * Fairly warm forecasts for the next two weeks help back
gains
 * Record inventories, high production keep buyers cautious
 * Coming Up: Baker Hughes rig data, CFTC trade data Friday

 (Releads, adds analyst quote, technical data, updates prices)
 By Joe Silha
 NEW YORK, July 26 (Reuters) - U.S. natural gas futures ended
higher on Thursday in a seesaw session, underpinned by a
slightly supportive weekly inventory report and fairly warm
weather forecasts for the next two weeks that should continue to
lift demand and slow storage builds.
 The U.S. Energy Information Administration report showed
total domestic gas inventories rose last week by 26 billion
cubic feet to 3.189 trillion cubic feet. 
 While the build matched the Reuters poll estimate and was
viewed as neutral by some, others saw it as supportive, noting
it fell well short of last year's gain of 48 bcf and the
five-year average increase for that week of 61 bcf.
 Front-month August gas futures on the New York
Mercantile Exchange, which expire on Friday, ended up 3.5 cents,
or 1.1 percent, at $3.105 per million British thermal units
after swinging between $3.018 and $3.129 after the EIA report. 
 It was the sixth gain in seven sessions for the front
contract, which is up about 11 percent during that period.
 Widespread heat has slowed storage builds to below average
for 13 straight weeks and pulled a record inventory surplus to
year-ago down nearly 45 percent from late-March highs.
 "Above normal temperatures still are a positive for natural
gas prices even though the current forecast is not as severe as
the temperatures actually were back in June," said the Energy
Management Institute's Dominick Chirichella.
 Chirichella also said that while the weekly storage
injection matched consensus estimates, it was supportive versus
bigger builds seen last year and in the five-year average.
 Technical traders said profit taking after recent gains at
times pressured the complex today, particularly with the August
contract set to expire on Friday.
 They noted that futures open interest declined by nearly
20,000 contracts in Wednesday's 4 percent sell-off, a sign that
long liquidation, not new selling, mostly drove prices lower.  
 Early this year, decade-low prices below $2 helped tighten
the supply/demand balance for gas by prompting many utilities to
switch from coal to cheaper gas to generate power.
 Record heat this summer, particularly in the Midwest but
also at times in the Northeast, lifted demand further and helped
drive gas prices up nearly 65 percent from spring lows, hitting
a seven-month high near $3.20 earlier this week.
 But many traders see only limited upside from here with peak
summer heat likely to fade in the next few weeks and storage and
production still at or near record highs.
 MDA EarthSat expects heat to continue, particularly for the
Midwest. "The forecast for this (11-15 day) period has held
steady, keeping a broad coverage of aboves in place. The core of
the anomalous warmth remains focused over the Central U.S."
 Some traders also caution that as gas prices push above the
$3 mark, many utilities that switched this year from coal to
cheaper gas to generate power could move back to coal.
 ANOTHER LIGHT WEEKLY BUILD
 The weekly injection trimmed the surplus to last year by 22
bcf to 487 bcf, or 18 percent above the same week in 2011. It
also sliced 35 bcf from the excess versus the five-year average,
reducing that surplus to 435 bcf, or 16 percent.     
 (Storage graphic: link.reuters.com/mup44s)    
 But total storage stands at about 80 percent full, a level
not normally reached until mid-September. Producing-region
stocks are at 84 percent of estimated capacity.
 Concerns remain that the storage overhang could still drive
prices to new lows later this summer as storage caverns fill. 
 The storage surplus to last year must be cut by at least
another 240 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. EIA estimates that gas storage will climb
to 4.002 tcf by the end of October. 
 Early injection estimates for next week's EIA report range
from 18 bcf to 33 bcf versus last year's build of 43 bcf and the
five-year average increase for the week of 56 bcf.    
 PRODUCTION, STILL NEAR RECORD HIGHS
 Traders were waiting for the next Baker Hughes drilling rig
report on Friday after last week's data showed the gas-directed
rig count fell for the seventh time in eight weeks, hitting its
lowest level in 13 years. 
 (Rig graphic: r.reuters.com/dyb62s )
 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 that still produce plenty
of associated gas that ends up in the market after processing.
 Baker Hughes data last week showed that horizontal rigs, the
type used to extract oil or gas from shale, fell for a second
straight week. But the horizontal count at 1,164 is still not
far below the all-time high of 1,193 hit nine weeks ago.
 The shift to more horizontal drilling has slowed the overall
drop in dry gas output.    

 (Reporting By Joe Silha; Editing by Marguerita Choy and Andrew
Hay)
 
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