By Joe Silha
NEW YORK (Reuters) - U.S. natural gas futures posted strong gains on Monday after the season's first Gulf of Mexico storm disrupted some supplies there and to forecasts for warm weather this week that should have homes and businesses increasing air conditioner use.
Most computer models show Tropical Storm Debby, located in the northern Gulf of Mexico, to be steering northeasterly and dumping heavy rain across Florida and parts of the Southeast during the next few days.
While Debby did force several U.S. gas producers to shut in about 1 billion cubic feet of daily production, traders, noting wind speed had dropped slightly to just 45 miles per hour, said the system was not likely powerful enough to do any lasting damage to offshore facilities.
At 12:40 p.m. EDT (1640 GMT), front-month gas futures on the New York Mercantile Exchange, which expire on Wednesday, were up 7 cents, or 2.7 percent, at $2.695 per million British thermal units after climbing early to a near five-week high of $2.731.
"Once again it's all weather out there pushing on the natural gas contract," Gelber & Associates analyst Pax Saunders said in a report, referring to shut ins by Debby and some triple-digit heat seen in Texas and parts of the Midwest.
After a mild start to the week, AccuWeather.com expects temperatures in the Northeast and Upper Midwest, key gas consuming areas, to post above-normal readings in the high-80s and low-90s Fahrenheit.
Signs that record production was finally slowing and demand picking up as electric utilities switch from coal to cheaper gas for power generation have helped underpin prices this spring.
Strong utility demand for gas has pared inventory builds to below average for eight straight weeks and helped pull a huge surplus to last year down 23 percent from late-March highs.
But stocks are still well above last year and the five-year average, and many traders remain skeptical of the upside, noting inventories offer a huge cushion that can help meet any spikes in demand or storm-related disruptions in supply.
In addition, traders cautioned that if prices rise much further, toward the $3 area, they will reach levels that will slow or reverse recent fuel switching by electric utilities.
Lagging stock builds this spring have raised expectations that record-high storage can be trimmed to more manageable levels in the 21 weeks left before winter withdrawals begin.
Data from the U.S. Energy Information Administration last week showed that total domestic gas inventories for the week ended June 15 rose by 62 billion cubic feet to 3.006 trillion cubic feet.
The build trimmed the surplus to last year by 28 bcf to 680 bcf, or 29 percent above the same week in 2011. It also sliced 25 bcf from the excess versus the five-year average, reducing the total to 641 bcf, or 27 percent.
(Storage graphic: http://link.reuters.com/mup44s)
Inventories remain at record highs for this time, breaking the 3 tcf mark at the earliest ever, according to weekly and monthly EIA data going back more than 35 years.
Total storage is already 73 percent full and hovering at a level not normally reached until late August. Producing-region stocks are at 83 percent of capacity.
Concerns remain that the storage overhang could still drive prices to new lows this summer as storage caverns fill.
The storage surplus to last year will have to be cut by at least another 435 bcf to avoid breaching the government's 4.1-tcf estimate of total capacity. Stocks peaked last year in November at a record 3.852 tcf. The EIA expects gas storage to climb to a record 4.015 tcf by the end of October.
DEMAND UP, PRODUCTION GROWTH SLOWS
Gas demand picked up sharply this year as spring prices hit 10-year lows at $1.90 and prompted many utilities to use more gas-fired generators to produce power. But gas production is still flowing at near record high levels despite relatively low prices that have made many dry gas wells uneconomical.
Baker Hughes data on Friday showed the gas-directed rig count fell last week by 21 to 541, its eighth drop in nine weeks and the lowest since August 1999.
(Rig graphic: http://r.reuters.com/dyb62s )
A 42 percent drop in dry gas drilling in the last eight months has fed expectations that producers were getting serious about stemming the flood of record gas supplies.
But many analysts say that total output cuts estimated at about 1 bcf per day were not nearly enough to reduce supplies significantly. Most still expect production to average a record high for a second straight year.
The problem is that producers are still drilling aggressively in higher-value shale oil and shale gas liquid plays that also produce plenty of associated gas. That has slowed the overall drop in dry gas output.
(Reporting By Joe Silha; Editing by Bob Burgdorfer)