(Reuters) - Natural gas
futures held modest gains on Wednesday, as chilly weather in the Northeast and Midwest and steady gains in coal-to-gas switching helped boost demand despite milder extended forecasts and concerns about record-high supplies.
Traders noted cool weather this week from New York to Chicago has stirred more heating load, while warm temperatures in Texas and parts of the South triggered some cooling demand.
Low gas prices have also prompted more utilities to switch from coal to cheaper gas to generate power, adding as much as 8 billion cubic feet, or about 10 percent, to daily gas demand versus last year's levels.
"The market may be getting close to a bottom. Temperature-adjusted storage injections have been very low (bullish), which could help whittle down the (inventory) surplus pretty quickly," said Kyle Cooper, managing director of research at IAF Advisors in Houston.
At 1:15 p.m. EDT (1715 GMT), front-month gas futures on the New York Mercantile Exchange were up 5.9 cents, or 3 percent, at $2.034 per million British thermal units after trading between $1.971 and $2.044.
The near contract hit $1.902 on Thursday, its lowest since January 2002.
Rising demand has kept Henry Hub cash prices relatively firm, with the Hub up 17 cents this week and trading at a fairly strong differential at about flat or slightly over futures.
But despite recent attempts to move higher, many traders expect renewed pressure on prices with supplies still at record highs and forecasts looking more moderate next week.
AccuWeather.com expects temperatures in the Northeast and Midwest, key gas-consuming regions, to average below normal this week, but above-normal readings are forecast for both regions next week.
STORAGE PRESSURES PRICES
Utilities typically build inventories from April through October to help meet peak winter heating needs.
U.S. Energy Information Administration data last week showed domestic gas inventories for the week ended April 13 climbed to 2.512 trillion cubic feet, easily a record for this time of year. (Storage graphic:
link.reuters.com/mup44s)
EIA storage data on Thursday is expected to show gas inventories rose last week by 47 bcf, a build that would increase the surplus to last year and leave the excess to the five-year average unchanged at more than 900 bcf, or 56 percent.
Such a huge cushion could help meet any spikes in demand or storm-related disruptions in supply this year.
Concerns are growing that the inventory glut will drive prices lower this spring as seasonal weather demand fades and pressure prices again this summer as storage caverns fill and force more gas into an over-supplied market.
If weekly stock builds through October match the five-year average, inventories would top out at 4.594 tcf, 12 percent over peak capacity estimates of about 4.1 tcf.
Injection estimates for Thursday's EIA report range from 35 bcf to 69 bcf, with most in the low to mid-50s. Stocks rose an adjusted 35 bcf in the same week last year, while the five-year average build for that week is 47 bcf.
PRODUCTION AT OR NEAR RECORD HIGHS
Baker Hughes data last week showed the U.S. gas-directed rig count rose by seven to 631, only the third gain this year. The count hit a 10-year low two weeks ago.
(Graphic on rigs vs prices:
r.reuters.com/dyb62s )
The nearly steady drop in dry gas drilling -- the gas rig count is down a third since peaking last year at 936 in October -- has raised expectations that producers were finally getting serious about stemming the flood of record dry gas supplies.
But the cuts have not been reflected in pipeline flows, which are still estimated at or near record-high levels.
Analysts say any slowdown in dry gas output could take a lot more time, noting increased drilling in more-profitable shale oil and shale liquids prospects still produces plenty of associated gas that ends up in the market after processing.
The EIA expects output in 2012 to climb by 3 bcf per day, or 4.5 percent, to a record 69.22 bcfd.
TIGHTENING MARKET
Gas prices have been hovering near 10-year lows and helped tighten the market this year.
Coal-to-gas switching has offered the best chance of burning up some of the excess supply. Some analysts estimate there could be another 2 bcfd of potential switching if gas prices fall into the $1.60s or $1.70s.
Cheap gas prices have also drawn more interest from energy-intensive industries such as petrochemicals, steel and paper. Demand from the industrial sector is estimated to be up about 0.5 bcf per day this year.