April 9, 2012 / 4:48 PM / in 8 years

UPDATE 2-U.S. natgas futures end up after hitting 10-year low

* Front month slips overnight to lowest since February 2002
    * Shorts opt to take profits after new low
    * Record-high inventories, production limit price gains
    * Coming up: API oil data Tuesday, EIA oil data Wednesday

 (Releads; adds quote, closing prices)	
    By Joe Silha	
    NEW YORK, April 9 (Reuters) - Front-month U.S. natural gas
futures ended higher on Monday in a seesaw session, lifted by
short covering after prices slid overnight to a new 10-year low
on growing concerns about record-high supplies.	
    Traders said a shot of cold this week stretching from the
Midwest to the East may have triggered some buying, but the
warmer outlook for next week helped limit the gains.	
    Volume was fairly light after the long holiday weekend. New
York Mercantile Exchange floor and electronic trade was closed
on Friday for the Good Friday holiday.	
    The front-month gas futures contract on NYMEX
finished up 1.8 cents, or 0.9 percent, at $2.107 per million
British thermal units after slipping overnight to $2.061, the
lowest for the nearby contract since February 2002.	
    "There has been a bit of short covering as many participants
are expecting a less aggressive injection into inventory this
week after some unseasonably cold temperatures in parts of the
country (last week)," Energy Management Institute's Dominick
Chirichella said in a report.	
    But he added: "We are in the midst of a supply driven
imbalance in the market and the only thing that is going to
right the ship will be for a supply cut."	
    The nearby contract, which tumbled 19 percent in March in
its biggest monthly drop since August 2010, has traded mostly
sideways so far this month, down less than 1 percent to date.	
    But a flurry of bearish data last week on storage,
production and drilling only reinforced expectations that more
downside was possible, particularly with no extreme heat or cold
on the horizon to boost demand.	
    Some traders noted that weather next week might be warm
enough to stir more cooling load, particularly in the South.	
    "A very warm (six- to 10-day) forecast is again on tap for
the eastern half of the U.S.," private forecaster MDA EarthSat
said in a report, noting that temperatures much above normal
were expected for several days from the Midwest eastward.    	
    Utilities typically build inventories from April through
October to help meet peak winter heating needs, but this year
storage injections started a couple of weeks early.	
    Data on Thursday from the U.S. Energy Information
Administration showed that domestic gas inventories rose by 42
billion cubic feet to 2.479 trillion cubic feet in the week to
March 30. 	
    It was the third build in 2012 and the second straight week
in which injections came in well above market expectations.
Traders and analysts polled by Reuters had expected a 34-bcf
    The increase drove stocks further into record territory for
this time of year and sharply widened the surplus to a year
earlier and the five-year average, which could provide the
biggest pressure on prices this year.	
    (Storage graphic: link.reuters.com/mup44s) 	
    Storage finished March near 2.5 tcf, about 60 percent, or
950 bcf, above normal and easily above the previous March 31
record of 2.148 tcf from 1983.    	
    The huge inventory overhang could drive prices lower this
spring as seasonal weather demand fades, then pressure prices
again later in the injection season if storage caverns fill to
capacity and force more gas into a well-supplied market.	
    Early injection estimates for Thursday's EIA report range
from 20 bcf to 45 bcf versus last year's adjusted build of 7 bcf
and the five-year average increase for that week of 22 bcf.	
    The gas-directed rig count has fallen in 12 of the last 13
weeks, sinking last week to its lowest in nearly 10 years,
according to data from Baker Hughes in Houston.	
    (Graphic on rigs vs prices: r.reuters.com/dyb62s)	
    The fairly steady drop in dry gas drilling this year - the
gas rig count is down 31 percent since peaking at 936 in
mid-October - had stirred expectations that low prices were
finally prompting producers to slow record gas output.	
    But the drop has yet to be reflected in pipeline flows,
which are still estimated to be at or near record highs,
primarily due to rising output from shale.    	
    Horizontal rigs, the type most often used to extract oil or
gas from shale, fell for the second time in three weeks,
slipping 15 to 1,165, but the count is not far below the
all-time high of 1,185 hit in late January.	
    The share of horizontal rigs drilling for gas has fallen to
38 percent from 78 percent just two years ago, but analysts say
any slowdown in production could take a lot more time, noting
increased drilling for more profitable oil and liquids-rich 
prospects still produces plenty of associated gas.	
    EIA production data for January again disappointed the
bulls, with gross gas output climbing to a record of 72.85 bcf
per day, eclipsing the previous peak of 72.68 bcfd in November. 	
    Some analysts say the gas-directed rig count may have to
drop below 600 to reduce flowing supplies significantly. Most
analysts do not expect any major slowdown in gas output until
later this year.	
 (Editing by Dale Hudson and Andre Grenon)
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