March 26, 2012 / 2:23 PM / 7 years ago

UPDATE 3-US natgas futures end down, spreads to winter widen

* Cool early-week weather stirs morning buying
    * Mild midweek forecasts, record supplies weigh on sentiment
    * Coming up: API oil inventory data on Tuesday

 (Releads, adds spread data, updates with closing prices)	
    By Joe Silha	
    NEW YORK, March 26 (Reuters) - U.S. natural gas futures
ended lower on Monday after an early move upward, with front
months losing the most amid record-high supplies and milder
late-week forecasts despite recent declines in drilling and cool
temperatures to start the week.	
    Prices tried to rally early but buyers remained cautious,
with production still at or near all-time peaks, inventories at
a record for this time of year and spring temperatures seen
further slowing weather-related demand.	
    The front-month April gas futures contract on the New
York Mercantile Exchange finished 4.9 cents, or 2.2 percent,
lower at $2.226 per million British thermal units after sliding
to an intraday low of $2.224, just above the 10-year low of
$2.204 hit two weeks ago. April expires on Wednesday.	
    Record supplies and a mild March have helped drive the
front-month contract down 15 percent so far this month and
sharply widened spreads to winter contracts, with the December
premium to April spiking 33 percent to $1.057.	
    While high gas production, primarily from shale, has put
pressure on prices this year, recent steep declines in gas
drilling have stirred expectations that low prices would finally
force producers to slow record output.	
    Several producers have announced output cuts, but traders
said the reductions were not nearly enough to soak up sufficient
excess supply, particularly with inventories set to start the
stock-building season at a record and likely later to test
storage capacity limits.	
    After a cool start to the week, AccuWeather.com expects
temperatures in the Northeast and Midwest, key gas-consuming
regions, to warm to above normal by midweek, but daytime highs
of about 60 degrees Fahrenheit (15.6 Celsius) will fall well
short of the record readings seen over the last two weeks.	
    Traders noted some extended forecasts were calling for
cooler weather in parts of the East and Midwest, which could
lend some support to prices.	
    "It is worth noting that the current 11-15 day forecast is
more neutral, with some shift in the overall pattern that points
 to less bearish storage figures n the offing, provided that
forecast holds up," said Tim Evans at Citi Futures Perspective.	
    	
    RECORD PRODUCTION	
    Gas prices on Friday failed to react to Baker Hughes data
showing the gas-directed rig count fell for the 11th straight
week to 652, its lowest level since May 2002, when 640 rigs were
operating. 	
    (Rig graphic: r.reuters.com/dyb62s)	
    Despite the steady decline in gas drilling, the slowdown has
yet to be reflected in pipeline flows, which are still estimated
to be at or near record-high levels.	
    The U.S. Energy Information Administration (EIA) on Thursday
will issue its gross natural gas production report for January
after reporting a slight drop for December late last month.	
    While low prices should eventually discourage new output as
producers shift spending from dry gas to more-profitable oil or
gas-liquids prospects, analysts note there is still plenty of
associated gas that flows from those wells which partly offsets
any reductions in pure dry gas operations.	
    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.	
    	
    INVENTORY GLUT	
    EIA data last week showed gas inventories rose by 11 billion
cubic feet to 2.380 trillion cubic feet. 	
    The build, which was slightly above market expectations,
came about two weeks earlier than usual and kept storage at
record highs for this time. It was the first time in five years
that storage registered a gain for that week.	
    The inventory surplus, now more than 50 percent above the
five-year average, should provide a huge cushion to meet any
spikes in demand or storm-related disruptions in supply this
year. (Storage graphic: link.reuters.com/mup44s)    	
    Storage is likely to finish the month at a record high of
about 2.45 tcf, more than 55 percent above normal and easily
beating the previous March 31 record of 2.148 tcf set in 1983.	
    Early injection estimates for Thursday's EIA report range
from 20 bcf to 58 bcf versus last year's adjusted build of 7 bcf
and the five-year average decline for that week of 8 bcf.	
    Traders said the huge storage overhang could drive prices
lower this spring as seasonal weather demand fades, then
pressure prices again late in the April-through-October
stock-building season if storage caverns fill to capacity and
force more gas into a well-supplied market.	
    While cheap gas has slightly tightened the supply-demand
balance this year as manufacturers use more of the fuel and
utilities switch to gas from pricier coal to generate power,
most analysts agree it will be difficult for prices to move
higher until production shows concrete signs of slowing.	
	
 (Editing by Dale Hudson)
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