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Natural Gas Price Jumps 4%; Technical Trading Cited

Tuesday, 14 Feb 2012 04:08 PM

U.S. natural gas futures ended sharply higher on Tuesday, backed by technical buying after an early move into oversold territory, even though weather forecasts remain mild and supplies are at record levels.

Gas prices also got a boost from outages at nuclear power plants, and expectations that natural gas-fired generators will be called upon to produce more electricity.

Front-month gas futures on the New York Mercantile Exchange finished 10.1 cents, or 4.2 percent, higher at $2.532 per million British thermal units after trading between $2.434 and $2.569. More modest gains were seen in deferred months, with summer contracts up about 5 cents.

"Discussions of increased fuel switching and nuclear outages abound ... Today's play seems mostly technical given the outlook for relative inventory gains to be reported this week." Gelber & Associates analyst Pax Saunders said in a report.

Nuclear outages on Tuesday were running 4,300 megawatts above the five-year average, which could potentially add about 800 million cubic feet to daily gas demand. Gas-fired units are typically used to cover most reductions in nuclear generation.

But with production still at all-time highs and inventories likely to end a very mild winter at a record peak, most traders remained cautious about any upside without much colder weather to kick up heating demand.

After a cold weekend, AccuWeather.com expects temperatures in the Northeast and Midwest, key gas-consuming regions, mostly to average above normal this week.

The 11-15 day outlook from private forecaster MDA EarthSat still shows above-seasonal temperatures for the eastern half of the nation, with cold expected only in some states west of the Rockies.

Despite Tuesday's gains, traders said the lack of support from weather and expectations for another bearish weekly inventory report on Thursday were likely to limit any upside.

 

INVENTORY GLUT, A BIG PROBLEM FOR PRICES

U.S. Energy Information Administration data last week showed gas inventories fell to 2.888 trillion cubic feet but were still at record highs for this time, standing at more than 700 billion cubic feet, or 33 percent, above last year and the five-year average.

That is a huge cushion to meet any late winter demand.

With no extreme cold on the horizon, the growing inventory glut could turn out to be an even bigger obstacle for prices in 2012 than record-high production.

For one, concerns were growing that ratchets, or contractual obligations, could force some storage owners to cycle gas out of inventory, regardless of weather, to meet minimal turnover requirements before the end of the heating season.

The lack of heating demand this winter has slowed inventory withdrawals by about 480 bcf, or 33 percent below normal. More light inventory draws are expected in coming weeks, which will only add to the overhang and possibly pressure prices below the 10-year low of $2.231 hit three weeks ago.

Withdrawal estimates for Thursday's EIA report range from 104 bcf to 133 bcf, well below last year's drop of 230 bcf and the five-year average decline for that week of 178 bcf.

A Reuters poll on Tuesday showed analysts expected inventories to end the heating season at an all-time high of 2.215 tcf, about 43 percent above average and well above the previous record of 2.148 tcf set in 1983.

The huge cushion could also spell trouble for prices late in the summer stock-building season if inventory owners run out of room to store gas, forcing more supply into a glutted market.

Estimates for U.S. working gas storage capacity range from 4.1 tcf to 4.4 tcf.

 

 

 

RECORD PRODUCTION

Gas prices have also garnered some support over the last week or so amid recent declines in the gas rig count and announced production cuts from several producers.

But while several producers have said they would shut in some gas production due to low prices, traders said planned cuts so far were not enough to tighten a market seen oversupplied by as much as 3 bcf per day, or more than 4 percent.

Baker Hughes data showed the gas-directed rig count fell last week by 25 to 720, a 28-month low. It was the fifth straight weekly decline and reinforced expectations that low prices were finally forcing drillers to curb dry gas operations.

While the count is well below the 800 level some analysts say is needed to slow record output, analysts said the decline has yet to be reflected in pipeline flows, noting the shift to higher-value oil and gas liquids plays still produces plenty of associated gas that ends up in the market after processing.

The EIA last week slightly raised its estimate for marketed gas production this year to an all-time high of 67.64 bcfd, which would be the second straight annual record.

Most analysts do not expect any significant slowdown in gas output until late this year at the earliest.

Tighter environmental rules on emissions and relatively cheap gas prices should prompt more demand from utilities and industry, but analysts say it will be difficult to balance the gas market without serious production cuts.

© 2017 Thomson/Reuters. All rights reserved.

 
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2012-08-14
Tuesday, 14 Feb 2012 04:08 PM
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