Reuters: Financial Services and Real Estate: UPDATE 3-Short cover lifts US natgas futures slightly

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UPDATE 3-Short cover lifts US natgas futures slightly Jun 8th 2012, 19:39 Fri Jun 8, 2012 3:39pm EDT * Front month rebounds ahead of weekend after Thursday slide * Warm forecasts for Northeast, Midwest help back gains * Recent drilling, production data also lend support (Releads, updates prices, market activity, adds analyst comment, spread data) By Joe Silha NEW YORK, June 8 (Reuters) - U.S. natural gas futures ended with modest gains o n F riday, rebounding as investors covered short positions ahead of the weekend and a day after prices slid 6 percent when a weekly government report showed a big rise in gas inventories. On Thursday, gas prices notched their biggest one-day drop in more than four months after Energy Information Administration data showed inventories rose last week by a larger-than-expected 62 billion cubic feet to 2.877 trillion cubic feet. While the build exceeded expectations in a Reuters poll for a 56-bcf gain, traders noted it was below average for this time and again cut into the huge surplus relative to last year and the five-year average. "Much of the heavy lifting for the market move (lower) is done, and now we're looking at bargain hunting from the lows. Weather is slightly above normal, but not making any case for bigger support," Gelber & Associates analyst Pax Saunders said. Front-month gas futures on the New York Mercantile Exchange ended up 2.5 cents, or 1 percent, at $2.299 per million British thermal units after sliding overnight to nearly a six-week low of $2.231. Spreads to winter months were little changed on the day, with the December premium to July ending at 81.7 cents, flat from Thursday and still just 5 percent below its peak this year of 86.1 cents from mid-April. For the week, the nearby contract fell 1.2 percent. While prices on Thursday broke below the 40-day moving average for the first time in six weeks, a bearish technical sign, traders said warmer Northeast and Midwest temperatures expected next week could limit the downside from here. Gas demand jumped this year as prices slid to 10-year lows in the $1.90 area, prompting some electric utilities to switch from coal to cheaper gas for power generation. But traders said the May rally to a 3-1/2-month high of $2.76 may have driven prices high enough to slow or even reverse utility fuel switching, citing last week's unexpectedly-big inventory build. SIGNS RECORD PRODUCTION SLOWING Traders noted recent declines in dry gas drilling and planned output cuts by several key producers finally seemed to be taking a toll on gas production. Baker Hughes data showed the gas-directed rig count fell by 23 to 565, its sixth drop in seven weeks and the lowest in nearly 13 years when there were 561 gas rigs operating. (Graphic: r.reuters.com/dyb62s ) The nearly steady drop in dry gas drilling in the last eight months -- the gas count is down 40 percent since peaking last year at 936 in October -- has raised expectations that producers were finally getting serious about slowing record supplies. Baker Hughes also reported that horizontal rigs, the type often used to extract oil or gas from shale, fell for a third straight week, dropping six to 1,177. But the count is still just below the all-time high of 1,193 set three weeks ago. 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. EIA data last week showed gross gas production in March fell for a second straight month. Output hit a record high of 72.74 bcf per day in January, but three declines in the last four monthly reports have stirred talk that low prices were finally forcing more producers to slow production. Analysts said the cuts so far were not enough to reduce supplies significantly, noting production in 2012 was expected to set a record high for a second straight year. STORAGE AT RECORD The big inventory build still fell short of last year's gain, trimming the surplus to last year by 19 bcf to 713 bcf, or 33 percent. Current stocks are also 31 percent above the five-year average. (Storage graphic: link.reuters.com/mup44s) Strong utility demand for gas has slowed inventory builds to below average in eight of nine previous weeks, pulling the surplus to last year down 20 percent from late-March highs. But with stocks still at record highs for this time of year, concerns remain that the huge inventory overhang will drive prices lower this summer as storage caverns fill. The storage surplus to last year will have to be cut by at least another 465 bcf to avoid breaching the government's 4.1-tcf estimate of capacity. Stocks peaked last year in November at a record high of 3.852 tcf. Early injection estimates for next week's EIA report range from 64 bcf to 85 bcf versus last year's adjusted build of 72 bcf and a five-year average increase for that week of 88 bcf. (Additional reporting by Eileen Houlihan; Editing by David Gregorio) Link this Share this Digg this Email Reprints

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