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September gas continues to unwind as storage prospects weigh on values

After ending the prior session down 1.1 cents at $2.800/MMBtu, NYMEX September natural gas futures extended losses overnight ahead of the Friday, Aug. 4, open, as traders looked beyond the latest modest storage build toward a potential ramp up in the pace of inventory rebuilding amid lackluster weather-related demand in the weeks ahead. At last look, at 7:00 a.m. ET, the front-month September contract was down 3.2 cents to trade at $2.768/MMBtu, amid ongoing profit taking.

The slower-than-normal pace of storage-building continued into the latest inventory report week ended July 28, for which the U.S. Energy Information Administration outlined a net 20-Bcf injection that defied the 3-Bcf pull in the prior year, but trailed consensus estimates that had called for a 25-Bcf build and the 44-Bcf five-year average addition to stocks. It took total working gas stocks to 3,010 Bcf, or 279 Bcf below the year-ago level and 87 Bcf above the five-year average of 2,923 Bcf.

Predominantly warmer weather across the contiguous U.S. that bolstered cooling demand for natural gas is seen to have allowed for another modest storage build.

Absent weather-related demand support going forward, however, market participants are beginning to anticipate a reprise of larger storage injections in the coming weeks. Already, lackluster cooling demand is likely to have driven down power-sector demand for natural gas at the close of July into early August, as the EIA's latest "Natural Gas Weekly Update" for the week to Aug. 2 show an 8% week-on-week decline in power burn that drove a 3% reduction in total U.S. gas consumption.

Diminished overall demand for natural gas during the week in review combined with steady supply, supporting anticipation of an improvement in rate of weekly builds in the subsequent storage report.

Farther out, colder weather in store for the bulk of the country's eastern two-thirds through mid-August should keep cooling load deflated and power burn lackluster, which should leave more natural gas production unutilized and available to be moved into underground storage facilities.

The latest National Weather Service forecast maps continue to show below-average temperatures holding over much of the Rockies, nearly the entire central U.S. and the bulk of the East in the upcoming six- to 10-day period, before slightly receding from the upper tier of the country but remaining dominant over the same regions and overtaking more of the Southeast in the eight- to 14-day period. Average temperatures hem in the broad swath of colder weather through both periods to settle over the northern tip of Maine, a few areas of the South and a slim band in the Rockies in the shorter-range view, with the addition of most of the Northeast and small portions of the Midwest into Rockies in the longer-range view.

Above-average temperatures should be contained to the remainder of the West, southern tip of Texas and small patches of the Eastern Seaboard.

Although demand could be boosted to some extent by coal-to-gas switching as it becomes increasingly less costly to fuel dual-fuel generators with lower cost natural gas as opposed to higher cost coal, analysts continue to expect a steady improvement in storage levels that would ultimately bring inventories to a healthy end-of-season level.

Estimates for end-of-October inventories range from Morgan Stanley analysts' projected consensus of 3.75 Tcf to as much as the 3.94 Tcf forecast by the EIA.

In cash trading, price action for day-ahead natural gas was mixed with a dominant downside bias Aug. 3.

Looking at the key hubs, a near 71-cent decline steered Transco Zone 6 NY spot gas price activity to an index at $1.873/MMBtu, as a roughly 2-cent slump took Chicago next-day gas pricing to an average at $2.752/MMBtu. By contrast, an almost 2-cent gain brought benchmark Henry Hub cash gas price action to an index at $2.780/MMBtu, as a roughly 1-cent uptick nudged PG&E Gate hub pricing to an average at $3.260/MMBtu.

Regional indexes unraveled overall. Day-ahead gas prices in the Northeast fell by about 34 cents on average to an index at $2.286/MMBtu, as cash gas price activity in the Midwest logged a near 2-cent slump in deals averaging at $2.650/MMBtu. Spot gas pricing in the Gulf producing region shed around 1 cent on the day to average at $2.714/MMBtu, as next-day gas price action in the West deflated by near 6 cents to an index at $2.495/MMBtu.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power and natural gas index prices, as well as forwards and futures, visit our Commodities pages.