By Joe Silha
NEW YORK (Reuters) - A combination of blistering heat across the United States and strong utility demand has reduced the chance that natural gas inventories will hit their limits ahead of winter and in turn force a deep drop in prices.
While experts still see stockpiles hitting a pre-winter record for a fourth straight year, traders and analysts polled by Reuters expected inventories to be well short of estimated U.S. storage capacity.
Natural gas inventories are now expected to end the so-called injection season leading up to the winter cold at 3.973 trillion cubic feet. That would be about 3.1 percent above last November's all-time high of 3.852 tcf but down from the previous forecast in May of 4.109 tcf -- the estimated limit of U.S. capacity.
The threat inventories would test capacity stirred concerns that prices could fall into a tailspin, spiraling well below 10-year lows hit in April under $2 per million British thermal unit (mmBtu).
"I'm not of the mindset that we're going to exceed capacity across the country," said Kyle Cooper, managing partner at IAF Advisors in Houston.
"There may be a couple of facilities that have problems, but it shouldn't be widespread."
Worries inventories would fill to the brim came after the fourth mildest winter on record left stockpiles at 2.5 tcf at the beginning of April, the highest level ever for the start of the injection season, which runs through October.
Additional pressure came from near record high production from booming domestic shale gas plays.
When prices plunged to decade-lows in the spring, however, demand picked up as electric utilities began to switch from coal to gas in droves. Cheap gas has also drawn more interest from energy intensive industries like petrochemicals and paper.
At its peak in the spring, analysts estimated that switching added more than 7 billion cubic feet, or 10 percent, to daily gas demand versus last year at that time. It probably is still running at about 4-5 bcf per day above year-ago.
Then record summer heat hit, mostly in the Midwest but also at times in the East, and stirred more demand for gas by forcing homeowners and businesses to crank up air conditioners.
On Wednesday, the National Oceanic and Atmospheric Administration said the January-to-July period has been the warmest for the lower 48 U.S. states since record keeping began in 1895.
The steady heat has shocked forecasters who had expected a slightly warmer-than-normal summer but not one that might top last year's records. It pulled the huge inventory surplus, that peaked in late March at nearly 900 billion cubic feet above year-ago, down by nearly half.
If storage this year matches the consensus forecast, it would stand at about 8 percent above the five-year average but well short of estimates for peak capacity.
"I think the risks to reaching capacity are lower than they were at the beginning of summer, but if we get a round of heavy injections later in the season, estimates could get revised upward," Stefan Revielle, analyst at Credit Suisse, said.
Of the 28 participants in the Reuters poll, all but one expected storage to beat last year's high, with responses ranging from a low of 3.85 tcf to a high of 4.169 tcf.
Those on the high side of expectations see injections picking up significantly later in the season as weather-related demand fades.
There were 22 downward revisions from the previous poll, three upward revisions and two unchanged. One did not participate in the May poll.
STORAGE STILL A CONCERN
Utilities typically store gas in underground caverns from April through October to help meet about 30 percent of peak winter heating needs. Caverns are currently 79 percent full and hovering at a level not normally reached until mid-September.
While the hot summer helped whittle down some surplus gas, analysts said the market could face problems if demand eases.
"We're not out of the woods yet. If the (hot) weather goes away, gas prices may have to trade lower to pick up more demand," said David Pursell, managing director at Tudor, Pickering, Holt & Co. in Houston.
Record heat in July - the hottest month on record according to government data - drove gas prices above $3 per mmBtu last month, raising concerns that some utilities could move back to coal, which would slow gas usage and force excess supply into already-packed inventories.
Total stocks of 3.241 tcf remain at record highs for this time of year and offer a huge cushion that can help meet any weather-related spikes in demand or supply disruptions from storms. The storage overhang to last year - still about 465 bcf - will have to be cut by at least another 215 bcf to avoid breaching capacity.
If weekly stock builds through October match the five-year average, total storage would peak just below capacity at 4.061 tcf. The U.S. Energy Information Administration estimates stocks will reach 3.954 tcf by the end of October.
PRODUCTION STILL HIGH
While lagging storage builds this summer have reduced the risk of topping capacity, trimming the rest of the overhang will not be easy with production flowing about 3 billion cubic feet per day higher than last year.
There is little evidence that producers have slowed record output despite dwindling margins that have pulled the gas-directed rig count down to 13-year lows, according to Baker Hughes data.
In its Short-term Energy Outlook on Tuesday, EIA trimmed its estimate for domestic natural gas production growth in 2012, but still expects output to be up 2.5 bcf per day, or 3.8 percent, from 2011's record levels.
"Production could decline a little bit at the back half of the year, but if you're looking for a drastic decline, you might be waiting a long time," Tudor Pickering's Pursell said.
(Additional reporting by Eileen Houlihan; Editing by David Gregorio)