Front-month U.S. natural gas futures fell to a 10-year low on Thursday, undermined by mild weather forecasts and a government report showing a weekly inventory build well above market expectations.
The U.S. Energy Information Administration report showed total domestic gas inventories rose last week by 57 billion cubic feet to 2.437 trillion cubic feet.
It was the second build in 2012 and drove stocks further into record territory for this time of year, sharply widening the surplus to year-ago and the five-year average.
At 12:30 p.m. EDT (1630 GMT), the front-month gas futures contract on the New York Mercantile Exchange was down 12 cents, or 5.3 percent, at $2.162 per million British thermal units after sinking late morning to $2.157, the lowest for the nearby contract since February 2002.
Just before the release of the weekly storage data at 10:30 a.m., the front month was trading around $2.24.
"The 57 Bcf injection was bearish relative to street expectations. The market is selling off sharply as the overarching bearish theme is still intact," said Mike Tran, analyst at CIBC World Markets, said in a report.
"Weather forecasts have moderated over recent days, but remain far from being supportive," he added.
Despite declines in gas drilling and output cuts by some producers, record-mild March weather sharply slowed overall demand and helped drive futures prices down some 17 percent so far this month, and more downside is expected.
Traders said record or near-record high gas production, primarily from shale, and a huge inventory surplus could drive prices to new lows this spring as weather demand fades.
Few traders expect much upside without much warmer weather to kick up air conditioning demand.
AccuWeather.com still expects temperatures in the Northeast and Midwest, key gas-consuming regions, to mostly average above normal for the next two weeks, with daytime highs at times climbing above 70 degrees Fahrenheit (21 degrees Celsius).
The weekly inventory build was well above the Reuters poll estimate of 45 bcf and the 7 bcf gain for the same week last year. The five-year average for that week is an 8 bcf decline.
Those on the high side of estimates said steeper cash discounts to futures last week of 15-25 cents likely prompted more injections, particularly among economic players that use high-deliverability salt dome storage in the producing region.
The surplus to last year widened by 50 bcf to 816 bcf, or 50 percent. The excess to the five-year average jumped 65 bcf to a whopping 900 bcf, or nearly 60 percent.
Injections this year have started about two weeks earlier than usual, and inventories are set to finish the month near 2.5 tcf, about 60 percent above normal and easily above the previous March 31 record of 2.148 tcf from 1983.
Early injection estimates for next week's EIA report range from 8 bcf to 49 bcf versus last year's adjusted draw of 29 bcf and the five-year average build for that week of 8 bcf.
The inventory surplus will provide a hefty cushion to meet any spikes in demand or storm-related disruptions in supply this year. It is expected to grow further in coming weeks, at least until air conditioning demand picks up and slows injections.
PRODUCTION, ALSO A PROBLEM FOR BULLS
A steady decline in gas drilling - the Baker Hughes gas-directed rig count has dropped for 11 straight weeks to a 10-year low of 652 - has stirred expectations that low gas prices would finally force producers to slow dry gas output. (Rig graphic: http://r.reuters.com/dyb62s )
But the drop has yet to be reflected in pipeline flows, which are still estimated to be at or near record high levels, primarily due to rising output from shale.
Traders will be looking for some sign that output is slowing when on Thursday the EIA releases its gross natural gas production report for January.
In late February, the agency reported a slight drop for December, the first measurable decline since well freeze offs curbed output in January and February 2011.
Some analysts say the gas-directed rig count may have to drop below 600 to reduce flowing supplies significantly, noting the producer shift to higher-value oil and gas liquids plays still produces plenty of associated gas that partly offsets any reductions in pure dry gas output.
Most analysts do not expect any major slowdown in gas output until later this year.
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