MARKETS-OIL/

Oil Prices Slide on Demand Worries

Energy Reuters

U.S. natural gas futures were about 2 cents lower early Thursday, edging off with weaker crude, continued mild weather and forecasts that weekly storage data will show an early build to already bloated inventories.

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But traders, noting the front month contract remained above last week's 10-year spot chart low, said declines in drilling rigs, output cuts by some producers and heavy nuclear plant outages were underpinning prices.

Front-month April natural gas futures on the New York Mercantile Exchange were at $2.345 per million British thermal units in early activity, down 1.5 cents.

Last week the April contract slid to $2.204 per mmBtu to mark the lowest price for a front month in just over 10 years.

STORAGE OVERHANG A PROBLEM FOR PRICES

Last week's storage report from U.S. Energy Information Administration showed total domestic gas inventories fell to 2.369 trillion cubic feet but remain 45 percent above year-ago levels and nearly 52 percent above the five-year average level.

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With extreme mild weather across much of the nation last week, most traders expect this week's EIA report to show an early injection into storage.

Estimates for this week's EIA report ranged from a draw of 2 bcf to a build 27 bcf, with most traders and analysts expecting data will show a build of about 10 bcf when it is released today
at about 10:30 a.m. EDT, a Reuters poll showed.

Last year stocks fell an adjusted 20 bcf, while the five-year average drop for that week is 17 bcf.

Storage is likely to finish the month at a new all-time high over 2.4 tcf, 55 percent above normal and well above the previous record of 2.148 tcf set in 1983.

The cushion could spell more trouble for prices late in the summer stock-building season if storage caverns fill to capacity and force more supply into the market.

OUTAGES, CUTS COULD HELP TIGHTEN MARKET

Nuclear plant outages were running at about 21,200 megawatts, or 21 percent, on Thursday, up from 17,000 MW out a year ago and a five-year outage rate of about 17,100 MW.

Traders said the outages could add more than 1 bcf to daily gas demand. And planned output cuts by producers could trim 1 bcf per day or more from flowing supply.

Relatively cheap gas has also drawn more industrial use and prompted additional utility fuel switching away from more expensive coal.
    
MORE FUNDAMENTALS 

The National Weather Service six- to 10-day outlook issued on Wednesday again called for above or much-above-normal readings for more than the eastern two-thirds of the nation and
below-normal readings only on the West Coast.

Baker Hughes drilling data last week showed the gas-directed rig count fell for a 10th straight week to a 10-year low of 663.

The steady drop in gas-directed drilling has stirred talk that low prices might finally slow output.

Analysts agree it can take months for a slowdown in drilling to translate into lower production, noting the producer shift in spending to higher-value oil and gas liquids still produces plenty of associated gas that partly offsets reductions in dry gas output.

A recent Bernstein report said the gas-directed rig count would have to drop to about 600 before it would be comfortable forecasting flat to falling production, but some traders think
that number is still too high.

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