May 21st, 2012

Natural gas futures remained lower near midday on Monday hit by profit-taking after last week’s sharp gains, but signs of a tighter supply-and-demand balance and extended forecasts for warmer weather limited the downside.

Natural gas futures prices gained 9 percent last week and are still up 17 percent so far this month, amid signs that record production was finally slowing while demand picked up as more electric utilities switch from coal to cheaper gas to generate power.

Despite bullish technicals, some chart traders said the market was due for a pullback, noting the front-month contract shot into overbought territory near 80 percent when it peaked at a 3-1/2-month high of $2.759 per mmBtu on Friday.

At 12:50 p.m. EDT (1650 GMT), front-month gas futures on the New York Mercantile Exchange were down 6.6 cents, or 2.4 percent, at $2.676 per mmBtu after trading between $2.632 and $2.743. Futures have rallied some 40 percent since sliding to a 10-year low of $1.90 one month ago.

“The natural gas market is seeing a bit of profit taking despite the early development of Tropical Storm Alberto … and temperature forecasts that continue to look as though they’ll limit storage injections over the balance of the month,” Citi Futures Perspective analyst Tim Evans said in a report.

Traders said Alberto was no threat to Gulf Of Mexico oil and gas production, noting the storm, located off the U.S. Southeast coast, was steering away from U.S. shores.

Some traders did not rule out further gains once higher temperatures boost air-conditioning use.

“Overall a generally warm (11-15 day) forecast is expected to persist as the lack of any significant cool signals continues,” private forecaster MDA EarthSat said in a report.

Others remained skeptical of the upside with storage and production still at or near all-time highs and prices reaching levels that could slow or even reverse utility fuel switching, a big factor in boosting gas demand this year.

PRODUCTION STILL NEAR RECORD

Despite declines in dry gas drilling and planned output cuts by several key producers, gas production, primarily from shale, is still flowing at near-record highs.

Baker Hughes data on Friday showed the gas-directed rig count climbed by two last week to 600, just above the 10-year low of 598 hit two weeks ago. The 36-percent drop in the count since peaking at 936 in October has stirred talk that producers were getting serious about stemming the record supply.

But Baker Hughes data also showed that horizontal rigs, the type most often used to extract oil or gas from shale, hit another all-time high last week, climbing six to 1,193.

The shift away from dry gas to higher-value shale oil and shale gas liquid plays still produces plenty of associated gas that ends up in the market after processing. That has slowed the overall drop in dry gas output. (Rig graphic: r.reuters.com/dyb62s)

Recent government data showed gross gas production in February fell slightly from January’s record high. The decline was only the second in the last 12 months.

INVENTORIES STILL AT RECORD HIGHS

U.S. Energy Information Administration data on Thursday showed total domestic gas inventories rose by 61 billion cubic feet to 2.667 trillion.

While the build was above expectations — the Reuters poll estimate was looking for a 55-bcf gain — traders noted it was still below average for this time of year and cut the inventory surplus relative to last year and the five-year average.

The build trimmed the overhang versus last year by 25 bcf to 774 bcf, or 41 percent above the same week in 2011. It also cut 30 bcf from the excess versus the five-year average, reducing the total to 773 bcf, or 41 percent.

The surplus to last year has dropped 13 percent from late-March highs, but traders noted stocks are still at record high for this time. There are concerns that the storage glut will drive prices lower this spring as weather demand fades and will pressure prices again this summer as storage caverns fill.

Weekly inventory builds have fallen below average in five of the last six weeks but traders said more light injections will be needed to trim the huge overhang to more manageable levels in the 26 weeks or so left before winter withdrawals begin.

The storage surplus to last year will have to be cut by another 525 bcf to avoid breaching the government’s 4.1-tcf estimate of total capacity. Stocks peaked last year in November at a record high of 3.852 tcf.

Early injection estimates for Thursday’s EIA report range from 67 to 88 bcf versus last year’s adjusted build of 101 bcf and the five-year average increase for that week of 97 bcf. (Reporting By Joe Silha; Editing by John Picinich and Bob Burgdorfer)

- By Joe Silha Reuters.