HOUSTON (Dow Jones)--Natural gas futures settled slightly higher Thursday, as bargain hunters stepped into the market after prices sank on gains in U.S. inventories.
Natural gas for December delivery settled up 2 cents, or 0.5%, at $3.856 a million British thermal units on the New York Mercantile Exchange.
Futures had fallen as low as $3.745 a million British thermal units after the U.S. Energy Information Administration reported that gas inventories rose 67 billion cubic feet in the week ended Oct. 29. That matched the average analyst estimate in a Dow Jones survey, but the injection brought supplies to just 16 bcf below a record, and was well above the five-year average of a 26-bcf increase.
But with winter around the corner, buyers will flock to gas futures whenever they sink below $3.75, said Matt Smith, an analyst with Summit Energy. Gas demand soars during periods of extreme temperatures; a hot summer boosted consumption of gas-fired electricity by air conditioners, while winter should bring a spike in home heating demand.
In the coming weeks and months, gas futures are likely to respond directly to forecast temperatures in key home heating markets, such as the U.S. Northeast.
"We're not necessarily forming a floor, but it's going to take some sort of significantly warmer weather to really push lower from here," Smith said.
As temperatures plunge, the injections will decline rapidly and switch to withdrawals as winter weather drives up demand. But in the meantime, prices will come under pressure from high storage levels.
"We see more constructive data in the weeks ahead, but weakness off this number, not strength," wrote Tim Evans, an analyst with Citi Futures Perspective in New York.
Gas supplies have soared in recent years with the development of reserves once locked away in shale rock formations. At the same time, the recession and slow recovery have limited industrial demand, so that even an abnormally hot summer wasn't enough to hold down supplies heading into the fall. Analysts aren't expecting significant cutbacks in gas drilling until well into 2011. That could prevent or severely limit the usual winter price rally.
Gas prices are about $1 a million British thermal units lower than they were this time last year