REFILE-NYMEX-Natural gas prices crumble, approach 2009 low

(Clarifies headline)
* Front-month futures drop for sixth day to 28-month low
* High storage, record production weigh on sentiment
* Mild forecasts through January also pressure prices
* Coming up: Reuters EIA natgas storage poll on Wednesday

By Joseph Silha
NEW YORK, Jan 17 (Reuters) - U.S. natural gas
futures ended down sharply on Tuesday, their sixth straight
session loss, as mild winter weather and record high supplies
knocked prices to levels seen only twice in the last 10
years.
Prices have dropped 18.7 percent in the last six
sessions, the steepest six-day drop in nearly 4-1/2 years.
At the same time strong volume and record high open
interest indicate that traders are starting to pile in with
bearish bets.
While last week's drop in the gas rig count and reports some
producers were cutting back budgets for gas drilling could
eventually tighten supplies, most analysts agree there was
little on the horizon that could stem the bearish tide.
"The rig count is falling, but production is still
strong, and the (growing) inventory surplus to last year and the
five-year average is also weighing heavily on the market," said
Eric Bickel, analyst at Summit Energy in Kentucky.
Front-month gas futures on the New York
Mercantile Exchange slid 18.2 cents, or nearly 7 percent, to
settle at $2.488 per million British thermal units after sinking
early to $2.439, just above the September 2009 low at
$2.409.
A break below that benchmark would drive prices to levels
not seen since March 2002.
Unusually mild weather this winter has created an oversupply
by cutting heating demand for homes and businesses. Forecasts
through January, typically the coldest month of the year, show
no change in that trend.
"The (11-15 day) forecast remains quite warm through this
period as well, with little sign of any major cold upcoming,"
private forecaster MDA EarthSat said in its morning report.
While the front month is technically very oversold -- the 14
day relative strength index is hovering at a 17-month low of
about 13 -- and could bounce if short sellers decide to take
profits, there is little on the fundamental side to sustain a
rally.

STORAGE, A PROBLEM FOR HIGHER PRICES
Gas prices have been weighed down for the past year by
record high gas production, primarily from shale, which helped
drive prices down 32 percent last year and another 17
percent so far this year.
While low prices should eventually discourage new output as
producers shift spending from dry gas to more-profitable oil or
gas-liquids prospects, there is little or no evidence so far
that gas output is about to slow.
Drilling data last week from Baker Hughes showing the
gas-directed rig count slipped below 800 for the first time in
two years stirred talk that low prices were beginning to take a
toll on profits and could finally lead to a slowdown in
production.
But analysts note that there is still plenty of associated
gas that flows even as producers chase higher-value natural gas
liquids (NGL) like butane and propane. Most do not expect any
major slowdown in dry gas output until later this year at the
earliest.
"Producers are on a longer leash due to high NGL
prices," said Katherine Spector, head of energy strategy
at CIBC World Markets in New York, noting liquids-rich gas can
add several dollars per mmBtu to the value of overall
output.
Recent government data still estimates that 2012 domestic
gas production will hit a record high for a second year.
U.S. natural gas inventories paint an even more bearish
picture, with data showing storage running at 13 percent above
last year and 17 percent above the five-year average, a huge
cushion that is likely to grow further unless some extremely
cold weather arrives to help burn off some of the excess gas.
Storage started the heating season at record highs and the
lack of demand this winter could leave stocks at a record at the
end of the season, raising concerns that inventories will test
the limits of capacity before next November and drive prices
even lower as sellers struggle to find places to put gas.
"Weather forecasts keep indicating that surplus levels
are likely to continue to build at least into early February,"
Summit Energy's Bickel said, noting forecasts were calling for
fairly mild weather for most of the nation for the next two
weeks which should translate into sluggish demand.
Analysts recently have been revising upward their
estimates for end-winter inventories after mild weather in
November and December seriously slowed withdrawals.
Recent estimates range from 2 trillion cubic feet to
2.4 tcf. Inventories usually end the heating season at 1.55 tcf.
The record high for end-winter storage is 2.148 tcf set in
1983.
"The question becomes might we see a scenario that storage
is rejected due to a lack of capacity? That would be brutal for
the cash market," CIBC's Spector said.
Estimates for demonstrated peak U.S. working gas
storage capacity are in the 4.1-4.2 tcf area.

More fuel switching by utilities and industry from costlier
fuels such as oil and coal to gas could eventually yield more
demand and restore some balance to the market.
Tighter environmental rules on emissions this year
should also favor gas, a less polluting fossil fuel, but most
analysts agree these changes will take some time.

(Reporting By Joe Silha; Editing by Marguerita Choy and Alden
Bentley)