Reuters: Market News: UPDATE 5-US natural gas up 1 pct after touching 10-yr low

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UPDATE 5-US natural gas up 1 pct after touching 10-yr low Mar 13th 2012, 20:58 Tue Mar 13, 2012 4:58pm EDT * Front month up slightly on short-covering * Gas breaks to lowest intraday level since Feb. 2002 * Henry Hub, NY cash prices slide to 30-month lows * Mild weather on tap for much of nation * Coming Up: API oil data Tuesday, EIA oil data Wednesday By Eileen Houlihan and Edward McAllister March 13 (Reuters) - U.S. natural gas futures rose 1 percent on Tuesday as late short-covering pulled prices off a 10-year low, though a bearish outlook still weighs on sentiment. The spot contract has tumbled nearly 14 percent so far this month to levels not seen since February 2002, as mild weather and record production pushes inventories to all-time highs. Despite efforts by producers such as Chesapeake Energy and Canada's Encana Corp to shut-in production and slow drilling, some analysts still see the potential for gas prices to fall below $2 per million British thermal units (mmBtu). "You cannot rule out a $1 price handle. We have no weather demand to speak of in the next two weeks in the major consuming regions," said Gene McGillian, analyst at Tradition Energy in Stamford Connecticut. Front-month April natural gas futures on the New York Mercantile Exchange fell more than 3 percent to $2.204 per million British thermal units, the lowest level since February 2002, before rebounding in late trade to finish up 3 cents at $2.299. "This is definitely short-covering. These are prices we haven't seen in years and people felt they should go out and buy," said Tom Saal, analyst at INTL Hencorp Futures in Miami. Gas in storage is about 40 percent above average for this time of year, as buying slows due to a lack of cooler temperatures, a situation that is unlikely to change given continuing mild weather. Temperatures in key gas-consuming cities New York and Chicago were expected to climb to the low to mid-70s Fahrenheit (21-24 Celsius) by midweek, according to the Weather Channel's weather.com. Traders said the mild weather has curbed any late-winter heating demand across both regions. Other months rose as well, with the May contract settling up about 3 cents at $2.408, and summer months likewise 3 cents higher. The natural gas rig count fell to 32-month lows last week as producers slowed drilling, but prolific production from existing plays and a backlog of wells still ready come online means that production will not be affected for months. In the cash market, gas bound for the NYMEX delivery point Henry Hub in Louisiana was heard at $2.15, down 2 cents from Monday's average of $2.17 and at its lowest mark since September 2009. Late Hub cash deals were done at about a 9-cent discount to the front month, little changed from deals done early Monday at about a 12-cent discount. Gas on the Transco pipeline at the New York City gate was heard near $2.26, down 3 cents from Monday and also at its lowest price since September 2009. Prices at the Chicago Citygate fell 8 cents to $2.12 STORAGE OVERHANG A PROBLEM FOR PRICES Last week's gas storage report from the U.S. Energy Information Administration showed total domestic inventories fell to 2.433 trillion cubic feet, a record high for this time of year, and more than 700 bcf, or 40 percent, above both last year and the five-year average level. Early withdrawal estimates for this week's EIA report range from 47 bcf to 66 bcf versus last year's drop of 60 bcf and the five-year average decline of 79 bcf for that week. With no extreme cold on the horizon, stocks are likely to end winter at an all-time high of 2.2 tcf, well above the previous record of 2.148 tcf set in 1983. The cushion could also spell trouble for prices late in the summer stock-building season if storage caverns fill to capacity and force more supply into the market. MORE FUNDAMENTALS The National Weather Service six to 10-day outlook issued on Tuesday again called for above or much-above-normal readings for about the eastern two-thirds of the nation and below-normal readings only in the West. Baker Hughes drilling data last week showed the gas-directed rig count fell for a ninth straight week to a 32-month low of 670. The steady drop in gas-directed drilling has stirred talk that low prices might finally slow output. Analysts agree it can take months for a slowdown in drilling to translate into lower production, noting the producer shift in spending to higher-value oil and gas liquids plays still produces plenty of associated gas that partly offsets any reductions in dry gas output. A recent Bernstein report said the gas-directed rig count would have to drop to about 600 before it would be comfortable forecasting flat to falling production. Most analysts, noting it will be difficult to balance the gas market without serious production cuts, do not expect any major slowdown in gas output until late this year. Link this Share this Digg this Email Reprints

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