U.S. natural gas lower as mild weather, storage weigh

U.S. natural gas futures were about 2 cents lower early Wednesday, edging off amid ongoing concerns over a mild winter that has left inventories bloated despite recent production cuts.

Front-month March natural gas futures on the New York Mercantile Exchange were at $2.614 per million British thermal units in early U.S. activity, down 1.2 cents, after sliding 5.8 cents on Tuesday. The front month fell in late January to $2.231, a contract low and the lowest price for a front month since March 2002, forcing some producers, like Chesapeake Energy, to announce production cuts.

In the cash market, gas bound for the NYMEX delivery point Henry Hub in Louisiana was heard early near $2.60 on volume near 347 million cubic feet, down 3 cents from Tuesday's average of $2.63. Early Hub cash deals also eased slightly to about 1 cent over the front month contract, from deals done late Tuesday at about a 3-cent premium.

Gas on the Transco pipeline at the New York City gate was heard early near $2.88 on volume near 191 mmcf, down 6 cents from Tuesday's average of $2.94.

STORAGE STILL A BIG PROBLEM FOR PRICES
Despite some price gains last week, one of the mildest winters on record has slowed storage draws by about 530 billion cubic feet, or 33 percent, and left a huge cushion in inventories that could cap any more gains this year. Last winter at this time, cold weather had forced storage owners to pull more than 1.9 trillion cubic feet from inventory to help meet the surge in heating demand, but this season, only about 1.1 tcf of storage gas has been burned up, a 42 percent drop.

Data from the U.S. Energy Information Administration last week showed total domestic gas inventories stood at 2.761 tcf, still a record high for this time of year. Stocks are now 817 bcf, or 42 percent, above last year and 765 bcf, or 38 percent above average, a huge cushion that can easily meet any late-winter spikes in heating demand.

With extended forecasts still not showing any extreme cold on the horizon and winter winding down, traders said the huge surplus could pressure prices in late March if contractual obligations force utilities to cycle gas out of inventory to meet seasonal turnover requirements. Early withdrawal estimates for next week's EIA report range from 110 bcf to 171 bcf versus last year's drop of 102 bcf and the five-year average decline for that week of 145 bcf.

A Reuters end-winter inventory poll last week showed analysts expected stocks to end the heating season at an all-time high of 2.215 tcf, 43 percent above average and well above the previous record of 2.148 tcf set in 1983. The inventory glut 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 the market. Estimates for U.S. working gas storage capacity range from 4.1 tcf to 4.4 tcf, a level that could be tested if storage builds from April through October match last year's 2.2 tcf.

MORE FUNDAMENTALS
High temperatures in key gas-consuming cities New York and Chicago were seen in the mid-40s to the mid-50s Fahrenheit in New York and mostly the low-40s F in Chicago, according to the Weather Channel's weather.com.

The National Weather Service six- to 10-day outlook issued on Tuesday called for below-normal readings for much of the nation, but mostly above-normal readings in the East. Baker Hughes data on Friday showed the gas-directed rig count fell by four to 716, its lowest since October 2009. It was the sixth straight weekly decline and stirred more talk that low prices were finally forcing drillers to slow dry gas operations.

On Friday, Encana said it would shut in 250 million cubic feet per day of North American gas production immediately and expects to reduce output by up to 600 mmcf per day by the end of the year. But many traders remain skeptical of announced production cuts, noting the planned reductions so far were not enough to tighten a market oversupplied by as much as 3 billion cubic feet per day, or more than 4 percent.

Analysts said the recent slowdown in drilling has yet to be reflected in pipeline flows. They noted that producers have shifted spending to higher-value oil and gas liquids plays which still produce plenty of associated gas that ends up in the market after processing. Most analysts, noting it will be difficult to balance the gas market without serious production cuts, do not expect any major slowdown in gas output until late this year.