September 26, 2012 / 1:33 PM / 5 years ago

U.S. natgas futures rise ahead of October expiration

5 Min Read

NEW YORK (Reuters) - U.S. natural gas futures rose nearly 2 percent early on Wednesday, lifted by some short covering for a second day ahead of the October contract's expiration later Wednesday.

"Overnight natural gas futures advanced to a seven-day high as traders ignored what could be the largest storage injection of the year when reported tomorrow as they gear up for today's NYMEX futures expiration trading," said Addison Armstrong, senior director of market research at Tradition Energy.

In addition, a high number of nuclear power plant outages helped boost near-term demand, but mild autumn weather across much of the nation could limit more upside.

Despite the gains in futures, most traders agree prices will have a hard time breaking back above $3 per million British thermal units, the level at which gas tends to lose market share over coal for power generation.

As of 9:22 a.m. EDT (1322 GMT), front-month October natural gas futures on the New York Mercantile Exchange were at $2.972 per mmBtu, up 4.8 cents, or nearly 2 percent.

The nearby contract peaked at $3.277 in late July, its highest level since last December.

In the cash market, gas bound for the NYMEX delivery point Henry Hub in Louisiana was heard early up 8 cents at $2.92 on volume near 679 million cubic feet.

Early deals eased slightly to 3 cents under the front-month contract, from deals done late Tuesday even with the front month.

Gas on the Transco pipeline at the New York citygate was heard up 8 cents early at $3.07 on volume near 204 mmcf.

The National Weather Service's six- to 10-day outlook issued on Tuesday called for normal or below-normal temperatures for about the eastern half of the nation and mostly above-normal readings in the western half.

On the nuclear front, outages on Wednesday totaled 16,800 megawatts, or 17 percent of U.S. capacity, up slightly from 16,600 MW out on Tuesday, 11,400 MW out a year ago and a five-year outage rate of about 12,800 MW.

Stocks High Despite Lighter-Than-Normal Builds

The U.S. Energy Information Administration last week said domestic gas inventories rose the prior week by 67 billion cubic feet to 3.496 trillion cubic feet.

Most traders viewed the build as neutral, noting it was above Reuters poll estimates for a 64-bcf gain, but below last year's rise of 89 bcf and the five-year average increase for that week of 73 bcf.

Storage now stands 320 bcf, or 10 percent, above the same week in 2011 and 278 bcf, or 9 percent, above the five-year average.

(Storage graphic: link.reuters.com/mup44s)

Record heat this summer has kept weekly storage builds below the seasonal norm in 20 of the last 21 weeks and helped trim a huge storage surplus to last year from its late-March peak near 900 bcf.

But stocks are still at record highs for this time of year and hovering at a level not normally reached until the second week of October. The surplus offers a huge cushion that can help offset any spikes in demand or Gulf Coast supply disruptions from storms.

Traders said autumn injections are poised to pick up as weather loads fade, with early injection estimates for this week's report ranging from 69 bcf to 81 bcf versus a year-earlier build of 104 bcf and the five-year average increase for the week of 76 bcf.

Concerns remain that the inventory overhang will pressure prices this autumn if storage caverns fill to near capacity and back more natural gas into a well-supplied market.

Rigs Rise in Latest Week, Production Still High

Drilling for natural gas has been in a nearly steady decline for the last 11 months, but the gas-directed rig count rose last week by six to 454, Baker Hughes data showed on Friday. The tally hit a 13-year low the previous week. IDnL1E8KLBJL

While pure gas drilling has become largely uneconomical at current prices, gas produced from more-profitable shale oil and shale gas liquids wells has kept output stubbornly high.

(Rig graphic: r.reuters.com/dyb62s)

Editing by Sofina Mirza-Reid

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