UPDATE 3-US natgas futures end down, weather, production weigh

Fri Nov 30, 2012 4:17pm EST
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* Front-month contract posts monthly decline of 3.5 pct
    * Near-record storage, production keep buyers cautious
    * Prices should remain under pressure without colder weather

    By Joe Silha
    NEW YORK, Nov 30 (Reuters) - Front-month U.S. natural gas
futures ended lower on Friday, undermined by mild weather
forecasts for next week that should slow demand and by a
government report showing gas production in September had
climbed to a record high.
    Chart traders noted the front contract bounced early as
shorts covered ahead of the weekend after three days of
declines. But bearish fundamentals eventually overwhelmed the
price run up.
    "The weather looks bearish and the (EIA) gross production
data was certainly bearish, but we may have over-adjusted to the
downside," said Steve Mosley of the SMC Report, noting prices
could rebound next week if the weather outlook turns colder.
    The front contract, which hit a 13-month high of $3.933 on
Nov. 23, came under pressure this week as forecasts into early
December trended milder. Also weighing on sentiment was a
surprise inventory build on Thursday. Most traders in a Reuters
poll had expected a net decline.
    Front-month gas futures on the New York Mercantile
Exchange ended down 8.7 cents at $3.629 per million British
thermal units. The nearby contract lost 8.7 percent this week in
its biggest weekly decline in five months.
    For November, front futures posted a 3.5 percent drop,
pressured by recent selling amid concerns that demand to heat
homes and businesses will slow sharply next week as temperatures
moderate. It was the first monthly drop since August.
    While high nuclear plant outages could lift demand for gas,
traders said lighter power loads next week might reduce the need
for replacement generation. Gas-fired plants are usually used to
cover any lost nuclear generation.
    Most traders expect any price increases to be difficult
without sustained cold to boost demand, with storage and
production still at or near record highs.
    AccuWeather.com said it expected temperatures in the key
gas-consuming regions of the Northeast and Midwest to average
above to much-above normal for the next week, with highs at
times topping 60 degrees Fahrenheit (15.6 Celsius).

    Baker Hughes data on Friday showed the gas-directed
rig count fell by four this week to 424, still just above the
13-1/2-year low of 413 posted three weeks ago. 

    Drilling for natural gas has mostly been in decline for the
last year, with gas rigs down nearly 55 percent since peaking
last year at 936 in October. The steep slide has fed
expectations that producers might curb record output, but so far
production has not shown any significant signs of slowing.
    The associated gas produced from more-profitable shale oil
and shale gas liquids wells has kept dry gas flowing at or near
a record pace.
    U.S. Energy Information Administration data on Friday showed
gross natural gas production in September had climbed to a
record high of 73.05 billion cubic feet per day, eclipsing the
previous record of 72.74 bcfd set in January.   
    EIA data on Thursday showed domestic gas inventories had
risen last week by 4 bcf to 3.877 trillion cubic feet.
    Traders viewed the build as bearish, noting a Reuters poll
called for a 12-bcf draw, while the five-year average for that
week was an 18-bcf decline. Only one of the 30 participants in
the Reuters poll had expected stocks to gain. 

    While a huge inventory overhang, which peaked in early April
at nearly 900 bcf, has been almost wiped out, storage is still
at record highs for this time of year and offers a comfortable
cushion to meet any winter spikes in demand or unexpected
disruptions in supply.
    Stocks hit a record high of 3.929 tcf three weeks ago,
making this the fourth straight year in which inventories headed
into the heating season at a record peak.
    Traders expect storage in next week's report to drop below
year-ago levels for the first time in 13 months, with early
withdrawal estimates ranging from 43 bcf to 90 bcf. Last year
during that week, stocks fell 14 bcf, while the five-year
average draw is 51 bcf.