Tue Jul 3, 2012 3:14pm EDT
* Front-month below last week's 5-1/2 month high * Heat still on tap in six to 10-day outlooks * Recent storage data, drilling rig data supportive * Coming Up: API oil data Tuesday, EIA oil data Thursday (Updates prices to close, recasts) By
Eileen Houlihan NEW YORK, July 3 (Reuters) - U.S. natural gas futures rosenearly 3 percent on Tuesday, boosted in some pre-holiday shortcovering amid hot weather in much of the nation that hasincreased air conditioning demand. "The natural gas market is probing the upside, supported bycurrent hot temperatures that boost air-conditioning loads andrelated natural gas demand from utilities, leading to lowerstorage injections and a reduced storage surplus in turn," saidCiti Futures energy analyst Tim Evans. Last week nearby futures rose to a 5-1/2 month spot charthigh in what has become a scorching start to summer. But most traders expect little more upside, with priceshovering above the 200-day moving average near $2.83 per millionBritish thermal units. Analysts expect the market will have a hard time breakingthe $3 level, where gas loses its appeal over coal for powergeneration. Front-month August natural gas futures on the New YorkMercantile Exchange rose 7.5 cents, or 2.66 percent, tosettle at $2.899 per mmBtu, after moving in electronic tradebetween $2.786 and $2.902. Other months ended higher as well, with the Septembercontract up 7.9 cents, or near 3 percent, at $2.911, andwinter months up about 6 cents each. NYMEX will be closed on Wednesday for the U.S. IndependenceDay holiday. Last week the front month contract traded as high as $2.946,its highest mark since early January. Since posting a 10-year low of $1.902 twice in late April,nearby futures are up about 53 percent on signs that recordproduction was finally slowing and demand was picking up as moreelectric utilities switched from coal to gas. In the cash market, gas bound for the NYMEX delivery pointHenry Hub NG-W-HH in Louisiana rose 5 cents on average to$2.78, with late deals done about even with the front-monthcontract, little changed from deals done late Monday at a 1-centpremium. Gas on the Transco pipeline at the New York citygateNG-NYCZ6 rose 10 cents to $3, while Chicago gas NG-CHGC was9 cents higher on the day at $2.88. BELOW-AVERAGE BUILDS, BUT STILL BLOATED INVENTORIES Last week's gas storage report from the U.S. EnergyInformation Administration showed total domestic gas inventoriesrose by 57 billion cubic feet to 3.063 trillion cubic feet. The build, while above Reuters poll estimates for a 52 bcfgain, fell well short of last year's gain of 84 bcf and thefive-year average increase for that week of 85 bcf. It was theninth straight week the build was below average. Lagging storage builds this season have raised expectationsthat record-high inventories can be trimmed to more manageablelevels in the 20 weeks left before winter withdrawals begin. The weekly injection trimmed the surplus to last year to 653bcf, or 27 percent, and sliced the excess versus the five-yearaverage to 613 bcf, or 25 percent. (Storage graphic:
link.reuters.com/mup44s) Total storage is already 75 percent full and hovering at alevel not normally reached until late August. Producing-regionstocks are at 84 percent of estimated capacity. Concerns remain that the storage overhang could still driveprices to new lows this summer as storage caverns fill. The storage surplus to last year will have to be cut by atleast another 405 bcf to avoid reaching the government's 4.1-tcfestimate of total capacity. Early injection estimates for this week's EIA report, whichwill be delayed one day until Friday due to the holiday onWednesday, range from 37 bcf to 55 bcf versus last year's buildof 90 bcf and the five-year average increase for the week of 79bcf. Stocks peaked last year in November at a record 3.852 tcf.The EIA expects gas storage to climb to a record 4.015 tcf bythe end of October. DEMAND UP, PRODUCTION GROWTH SLOWS Gas demand picked up sharply this year as spring prices hit10-year lows and prompted many utilities to use more gas-firedgeneration to produce power. But gas production is still flowingat near-record-high levels despite relatively low prices thathave made many dry gas wells uneconomical. EIA's gross gas production report on Friday showed thatApril output rose 0.8 percent from March to 72.48 bcf per day,just shy of January's record of 72.74 bcf daily. But data from Baker Hughes last week showed the gas-directedrig count fell to 534, its ninth drop in 10 weeks and its lowestlevel since August 1999. (Rig graphic:
r.reuters.com/dyb62s) Horizontal rigs, the type most often used to extract oil orgas from shale, however, rose for a second straight week, and at1,171 are just shy of the record high 1,193 hit six weeks ago. A 43 percent drop in dry gas drilling in the last eightmonths has stirred expectations that producers are gettingserious about stemming the flood of record gas supplies. Dry gas drilling has become largely uneconomical at currentprices, but drillers have been moving rigs to more profitableshale oil and shale gas liquid plays that still produce plentyof associated gas that ends up in the market after processing. That has slowed the overall drop in dry gas output. MORE FUNDAMENTALS The National Weather Service's six to 10-day outlook issuedon Monday called for above-normal readings for much of thenation, with normal readings in the Northeast, Florida and inTexas. Nuclear power plant outages were running at about 8,500megawatts, or 8 percent, on Tuesday, up from 5,100 MW out a yearago and a five-year outage rate of just 3,900 MW. The U.S. National Hurricane Center said tropical cycloneformation was not expected over the next 48 hours. The Atlantichurricane season runs from June 1 through Nov. 30. The latest government statistics show the Gulf of Mexicoaccounts for 6 percent of U.S. gas production and just over 20percent of U.S. oil production.