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Natural gas futures - Weekly outlook: May 7 - 11

CommoditiesMay 06, 2012 10:40AM ET
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Investing.com - Natural gas prices came under pressure on Friday, as investors cashed out of the market to lock in gains from a sharp rally that took prices almost 10% higher in the past five sessions.

On the New York Mercantile Exchange, natural gas futures for delivery in June settled at USD2.282 per million British thermal units by close of trade on Friday.

On the week, prices surged 4.3%, the second consecutive weekly advance. Prices climbed to as high as USD2.381 on May 2, the highest since March 26.

Heading in to Friday’s session, natural gas prices had gained nearly 10%, with rises in four of the past five sessions.

Sentiment on the heating fuel has improved in recent weeks after hitting a string of fresh 10-year lows. Prices are up almost 17% since hitting a decade-low of USD1.902 on April 19, amid indications major North American natural gas producers were cutting back on production in response to lower prices.

Industry research group Baker Hughes said Friday that the number of active rigs drilling for natural gas in the U.S. fell by 7 last week to 606, the lowest since April 2002, when there were 591 rigs operating.

It was the fourth drop in the past five weeks. The gas rig count is down by almost 35% since peaking at 936 in October.

The steady decline in rigs drilling for natural gas in the U.S. has fuelled speculation that major North American natural gas producers will begin to curb output in response to declining prices.  

The report follows government data released earlier in the week showing that gross natural gas production in February fell 0.6% in the lower 48 states to 72.32 billion cubic feet per day, the lowest level since October 2011.

However, the rally prompted some investors to sell their position on profit taking and lock in gains, as traders remained concerned over elevated U.S. storage levels.

The U.S. Energy Information Administration said in its weekly report Thursday that natural gas storage in the U.S. rose by 28 billion cubic feet last week, compared to expectations for an increase of 31 billion cubic feet.

Inventories rose by 60 billion cubic feet in the same week a year earlier, while the five-year average change for the week is an increase of 79 billion cubic feet, according to U.S. Energy Department data.

Total U.S. natural gas storage stood at 2.576 trillion cubic feet as of last week, narrowing the supply overhang to last year by 32 billion cubic feet to 840 billion, or 48%. It also lowered the excess to the five-year average by 51 billion cubic feet, reducing the total to 857 billion cubic feet, or 50%.

Less than a month ago, traders faced inventories that were close to 60% above five-year average levels.

However, concerns are growing over whether enough capacity exists to store the fuel. Current inventories are at levels they did not reach until July of last year.

If weekly stock builds through October match the five-year average, inventories would top out at 4.532 trillion cubic feet, 9% over peak capacity estimates of about 4.1 trillion cubic feet.    

Early injection estimates for next Thursday’s storage data range from 25 billion cubic feet to 65 billion cubic feet, compared to last year's build of 71 billion cubic feet. The five-year average change for the week is an increase of 84 billion cubic feet.

In market news, legendary natural gas trader John Arnold announced earlier in the week that he was closing his Centaurus Energy master fund, after a couple of years of unsatisfactory returns, according to sources.

Elsewhere in the energy complex, light sweet crude oil futures for June delivery traded at USD98.55 a barrel by close of trade on Friday, plunging 5.95% on the week, while heating oil for June delivery tumbled 5.18% over the week to settle at USD3.015 per gallon by close of trade Friday, the lowest since January 3.

Natural gas futures - Weekly outlook: May 7 - 11

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