U.S. natural gas futures ended higher on Tuesday for a third day, reacting to more bullish technicals and to signs that record production might finally be slowing despite fading weather demand and still-high supplies.
Talk of more supply cuts by producers had backed some of the recent buying, traders said. Upside momentum picked up Monday after a government report showed gross gas production slipped in February, a possible sign that a steep decline in gas drilling this year was finally taking a toll on output.
Technical buying and short covering also fueled recent gains after front-month futures on Friday settled above the 40-day moving average for the first time in five months.
While moderating spring temperatures in northern tier states this week should slow weather-related demand, utility switching from coal to cheaper gas to generate electricity has given a huge boost to gas-fired power loads and tightened the market.
"Natural gas has been in a pretty strong short covering rally for the last week or so primarily driven by an increase in demand from coal to gas switching along with a growing view that the producing sector will in fact voluntarily cut production," Energy Management Institute's Dominick Chirichella said in a report.
Front-month gas futures on the New York Mercantile Exchange ended up 8.6 cents, or 3.8 percent, at $2.371 per million British thermal units after climbing late to a six-week high of $2.385.
The nearby contract, which hit a 10-year low of $1.902 just two weeks ago, has spiked 16 percent in the last three sessions, its biggest three-day gain in more than three months.
Despite the recent run up, many traders remain skeptical of the upside with inventories and production still at or near all-time highs.
Baker Hughes data on Friday showed the gas-directed rig count slid by 18 last week to 613, its lowest since April 2002.
The near steady drop in dry gas drilling -- the gas rig count is down 35 percent since peaking at 936 in October -- has raised expectations that producers were finally getting serious about stemming the flood of record gas supplies.
Royal Dutch Shell on Thursday said it would be switching the bulk of its gas drilling program in the United States toward the production of "wet" natural gas and away from "dry" gas.
Last week Encana, Canada's largest gas producer, also raised expectations about more gas supply cuts.
Chesapeake and Conoco had already announced cuts this year, but so far the reductions have not significantly slowed pipeline flows, which are still hovering near record levels.
U.S. Energy Information Administration data on Monday showed gross gas production in February fell 420 million cubic feet per day, or 0.6 percent, from January's record high.
While it was only the second monthly output decline in the last 12 months, it stirred talk that domestic production might finally have peaked and was poised for further slowdown.
But some analysts say any material cut in dry gas output may be a long time coming, noting rising drilling in higher-value shale oil and shale liquids prospects still produces plenty of associated gas that ends up in the market after processing.
EIA data last week showed total domestic gas inventories for the week ended April 20 rose by 47 billion cubic feet to 2.548 trillion.
While the inventory surplus has dropped some from the highs set a couple of weeks ago, storage is still at record highs for this time of year and stands at about 900 bcf, or 55 percent, above average, a huge cushion that could help meet any spikes in demand or storm-related disruptions in supply this year.
Concerns still persist that the inventory glut will drive prices to new lows this spring as seasonal weather demand fades. More pressure is likely this summer as storage caverns fill up and force more gas into an over-supplied market.
If weekly stock builds through October match the five-year average, inventories would top out at 4.583 tcf, or 12 percent over peak capacity estimates of about 4.1 tcf.
Early injection estimates for Thursday's EIA report range from 25 to 45 bcf versus last year's adjusted build of 60 bcf and the five-year average increase for that week of 79 bcf.
Low gas prices have caused more industrial use and prompted utilities to switch to cheaper gas from coal to generate power.
Government data shows first-quarter electric power demand jumped nearly 5 bcf per day, or 27 percent, above the same year-ago period, even as overall gas use fell due to a mild winter.
Some analysts estimate that increased demand from switching could climb to as much as 8 bcf per day versus last year and put a serious dent in an oversupplied gas market.
Energy-intensive industries such as petrochemicals have also increased their gas consumption. Demand from the industrial sector is estimated to be up as much as 1 bcf per day this year.
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