Profit takers hit natural gas after five week high

Investing.com - Natural gas traded lower during U.S. afternoon hours as profit takers arrived after the fuel reached 5 week highs on extremely hot weather.

Investors also eyed Thursday’s closely-watched U.S. government report on natural gas supplies.

On the New York Mercantile Exchange, natural gas futures for delivery in July traded at USD2.786 per million British thermal units during U.S. afternoon trade, giving back 0.77%.       

It earlier rose by as much as 2% to trade at a session high of USD2.947 per million British thermal units, which was the highest since January 10. The July contract is due to expire at the end Wednesday’s trading session.

Meanwhile, the more actively traded contract for August delivery surged 3.45% to trade at USD2.905 per million British thermal units. The August contract rose by as much as 5% earlier to trade at a session high of USD2.971, also the highest since January 10.

Natural gas prices were boosted by forecasts showing extremely warmer-than-normal weather across most parts of the U.S. in the coming ten days.

The Commodity Weather Group said Tuesday that temperatures were expected to reach 100 degrees Fahrenheit (38 Celsius) later this week from the Mississippi River to the mid-Atlantic.

Chicago is expected to reach 100 in two days and Washington may see 99 by the end of the week, according to the National Weather Service. 

Forecasters at MDA EarthSat echoed that sentiment, saying temperatures across the U.S. are expected to rise well above normal next week, with the central U.S. expected to see "extreme" temperatures.

Warmer-than-normal temperatures increase the need for gas-fired electricity to power air conditioning, boosting demand for natural gas. Natural gas accounts for about a quarter of U.S. electricity generation.

Meanwhile, market players shifted their focus to the U.S. Energy Information Administration’s closely-watched weekly report on natural gas inventories scheduled for Thursday.

Early injection estimates range from 40 billion cubic feet to 55 billion cubic feet, compared to last year's build of 84 billion cubic feet. The five-year average change for the week is an increase of 85 billion cubic feet.

The U.S. EIA said last week that natural gas storage in the U.S. rose by 62 billion cubic feet 3.006 trillion cubic feet last week, narrowing the surplus to 29% above last year's level and 27% above the five-year average level for that week.

The smaller-than-expected increase indicated that demand for the fuel is better-than-expected and suggested that demand for natural gas among power utilities remains strong.

The weekly gas report has been “bullish” in 10 of the past 11 weeks, raising expectations that record-high storage can be trimmed to more manageable levels in the 21 weeks left before winter withdrawals begin.    

Natural gas prices are up nearly 30% since touching a decade-low of USD1.902 on April 19, amid indications major North American natural gas producers were cutting back on production.

Speculation that utility providers in the U.S. were switching from pricier coal to cheaper natural gas provided further support over recent weeks. 

However, market players noted that sustained prices back above USD2.50 and toward the USD3.00-level likely would inspire some switching back to coal.

Market analysts have warned that without strong demand through the rest of the summer, gas inventories will reach the limits of available capacity later this year.

U.S. gas inventories did not hit the milestone 3 trillion cubic feet level until August 31 of last year.

The storage surplus to last year will have to be cut by at least another 435 billion cubic feet to avoid breaching the government's 4.1 trillion cubic feet estimate of total capacity.

Elsewhere on the NYMEX, light sweet crude oil futures for delivery in August rallied 1.6% to trade at USD80.65 a barrel, while heating oil for August delivery added 0.7% to trade at USD2.591 per gallon.