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US GAS : Profit-Taking Hits Futures After 5-Day, 10% Rally

05/04/2012 | 10:54am US/Eastern

--Rise in storage is less than expected, but stocks are at record high

--Storage surplus to year-ago, five-year average narrows

--Run toward $2.50/mmBtu, hit in February, is possible, analysts say

(Adds cash-market prices in last paragraph)

   By David Bird 

Natural-gas futures were down 3% early Friday as traders booked profits after a sharp five-day 10% rally on initial signs of a shrinking supply glut.

Prices continued to climb early in the session but turned weaker after failing to break out above the two-month-high of $2.371 per million British thermal units set at Tuesday's settlement. Still, some analysts said prices will rebound in coming days and make a run toward the $2.50/mmBtu level last seen in February, if inventory numbers continue to indicate shrinkage in the supply overhang.

Natural gas for June delivery on the New York Mercantile Exchange was down 6.9 cents, or 3%, at $2.271/mmBtu.

Heading into Friday's session, prices had gained 10%, or 21.4 cents, with rises in four of the past five sessions. The main incentive was news Monday from the Energy Information Administration that U.S. February gas output dropped to its lowest level since October 2011. Prices are more than 20% above the 10-year low of near $1.90/mmBtu set April 19.

Traders took the news that February output fell from the record-high January level as a hopeful sign that weak prices were leading to output cuts and that the vast market imbalance could be on the path to correcting itself.

Natural-gas output in the Lower 48 U.S. states fell 0.6% in February to 72.32 billion cubic feet per day, the EIA said. Output was 10.4% higher than the February 2011 level, when freezing temperatures disrupted output.

EIA weekly inventory data Thursday stoked the rally, showing storage levels a week ago increased by 28 billion cubic feet, slightly less than expected.

The supply overhang to last year shrank by 32 billion cubic feet, while the surplus to the five-year average contracted by 51 billion cubic feet. Inventories still remain almost 50% above the year-ago and five-year levels, at 2.576 trillion cubic feet. That is a record high for this time of year and wasn't reached ahead of the summer demand season until July of last year.

Jim Ritterbusch, president of Ritterbusch & Associates, said the price pop shows the market is anticipating "some significant production cuts that could easily fall short of most expectations."

Still, with large speculators seeing more upside than downside potential in the current market, he said he doesn't rule out a test of the $2.50/mmBtu level. An early start to summer or other factors that boost gas demand will be needed to sustain that level, he said.

"Price rallies driven by production curtailments often prove limited in any commodity since the output cuts are simply a reflection of an oversupplied market," he said.

Natural gas for next-day delivery at the benchmark Henry Hub in Louisiana recently traded at $2.25/mmBtu, according to IntercontinentalExchange, compared with Thursday's average of $2.294/mmBtu. Natural gas for next-day delivery at Transcontinental Zone 6 in New York traded at $2.35/mmBtu, down from $2.475/mmBtu.

-By David Bird, Dow Jones Newswires; 212-416-2141; david.bird@dowjones.com

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