Gas Market Update (August 1, 2012)

Natural gas prices this week broke out to their highest level since January.

The latest six-to-10-day weather maps continue to forecast above-normal temperatures across a large portion of the US, which has resulted in a boost in demand for natural gas to power air conditioning. There is some concern that the recent advance in prices to $3.25 per million British thermal units (MMBtu) could result in utilities switching from natural gas back to lower-priced coal.

With warmer weather forecast, traders expect weekly storage builds to stay below average and anticipate that the natural gas supply surplus will continue to be whittled down.

“Weather forecasts continue to provide support for gas prices, with above to well-above normal temperatures expected across the most of the East in the coming weeks,” Addison Armstrong at Tradition Energy said in a Reuters report.

According to a Reuters quarterly price poll released Monday, Henry Hub gas prices are expected to average $2.57 this year, two cents below the last quarter’s estimate of $2.55. Reuters data shows that prices have dropped about 36 percent below the 2011 average price of $4.02.

As of July 24, the Commitments of Traders Futures and Options report showed that non-commercial traders were net short 72,242 contracts, down 5,664. “Non-commercial and nonreportable traders combined held a net short position of 41,205 contracts, for a decrease of 7,005 in their net short positioning,” the report states.

Prices are holding above the psychological $3/MMBtu level, which traders say has become the new floor for prices. That level was traditionally viewed by many as the point at which power generators would switch from natural gas to coal. However, according to Dominick Chirichella of the Energy Management Institute, extreme heat has kept demand for natural gas high despite rising prices.

“Even with the economics of coal to gas switching still favorable to coal there should be enough demand to outstrip supply for the next several weeks,” Chirichella said in a note to clients.