February 13, 2012 / 2:58 PM / 7 years ago

UPDATE 3-Record supplies, weather drive US natgas to lower close

* Milder Northeast, Midwest weather weighs on prices

* Record high production, inventories keep buyers cautious

By Joe Silha

NEW YORK, Feb 13 (Reuters) - U.S. natural gas futures ended lower on Monday as milder weather forecasts for this week and record high supplies continued to pressure prices despite recent reports of some production cuts.

Front-month gas futures on the New York Mercantile Exchange finished down 4.6 cents, or 1.9 percent, at $2.431 per million British thermal units after trading between $2.395 and $2.47.

Gas prices garnered light support late last week on news that Chesapeake Energy, the country’s No. 2 gas producer, had cut more than 500 million cubic feet per day of output and may cut up to 1 billion cubic feet daily if prices remain low.

The chilly weekend outlook late last week also lent some support to prices, but forecasts this week look milder.

“The announced cuts by producers (so far) do not look like they will have much of an impact on the overall supply and demand balances anytime soon. The vast majority of the price drivers are still pointing lower,” Energy Management Institute’s Dominick Chirichella said in a report.

Chirichella noted that weekend forecasts from NOAA remained bearish, with mild temperatures expected for the eastern half of the nation for most of the rest of February.

Traders said expectations for another bearish weekly inventory report on Thursday were also stirring some selling.

With production still running at all-time highs and inventories likely to end a very mild winter at a record high, most traders remain cautious about any upside without much colder weather to kick up heating demand.

After a cold weekend, AccuWeather.com expects temperatures in the Northeast and Midwest, key gas-consuming regions, to mostly average above normal this week.

Extended forecasts from private forecaster MDA EarthSat show mostly above-seasonal temperatures for the eastern half of the nation, with cold only expected in some states west of the Rockies.

INVENTORY GLUT, A BIG PROBLEM FOR PRICES

U.S. Energy Information Administration data last week showed that total gas inventories fell to 2.888 trillion cubic feet but were still at record highs for this time, standing at more than 700 billion cubic feet, or 33 percent, above last year and the five-year average.

That is a huge cushion to meet any late winter demand.

With no extreme cold on the horizon and storage still at record highs for this time of year, the growing inventory glut could turn out to be an even bigger problem for prices in 2012 than record-high production.

For one, concerns were growing that ratchets, or contractual obligations, would force storage owners to cycle gas out of inventory, regardless of weather, to meet minimal turnover requirements before the end of the heating season.

The lack of heating demand this winter has slowed inventory withdrawals by about 480 bcf, or 33 percent below normal, and more light inventory draws are expected in coming weeks, which will only add to the overhang and possibly pressure prices below the 10-year low of $2.231 hit just two weeks ago.

Early withdrawal estimates for Thursday’s EIA report range from 100 bcf to 130 bcf, well below last year’s drop of 230 bcf and the five-year average decline for that week of 178 bcf.

Most analysts now expect inventories to end the winter near the all-time high for end-season storage of 2.148 tcf set in 1983, or nearly 40 percent above average.

The huge cushion could also spell trouble for prices late in the summer stock-building season if inventory owners run out of room to store gas, forcing more supply into a glutted market.

Estimates for U.S. working gas storage capacity range from 4.1 tcf to 4.4 tcf, a level that could be tested if storage builds from April through October match last year’s 2.2 tcf.

RECORD PRODUCTION

While several producers have said they would shut in some gas production due to low prices, traders said planned cuts so far were not enough to tighten a market seen oversupplied by as much as 3 bcf per day, or more than 4 percent.

Baker Hughes data on Friday showed the gas-directed rig count fell last week by 25 to 720, a 28-month low. It was the fifth straight weekly decline and reinforced expectations that low prices were finally forcing drillers to curb dry gas operations.

While the count is well below the 800 level some analysts say is needed to slow record output, analysts said the decline has yet to be reflected in pipeline flows, noting the shift to higher-value oil and gas liquids plays still produces plenty of associated gas that ends up in the market after processing.

The EIA last week slightly raised its estimate for marketed gas production this year to a record high 67.64 bcfd, which would be the second straight annual record.

Most analysts do not expect any significant slowdown in gas output until late this year at the earliest.

Tighter environmental rules on emissions and relatively cheap gas prices should prompt more demand from utilities and industry, but analysts say it will be difficult to balance the gas market without serious production cuts.

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