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September natural gas continues to unwind, ends week at new 5-month low

Posting its third straight losing session, NYMEX September natural gas futures continued to unravel Friday, Aug. 4, as traders looked ahead to lackluster weather forecasts that imply healthier storage rebuilding in August. After spending the whole day in the red, the front-month September contract closed the week 2.6 cents lower on the day at a new five-month low of $2.774/MMBtu.

Since ending at $3.043/MMBtu on July 20, the front-month contract has fallen 26.9 cents, or 8.8%, in just more than two weeks.

The latest inventory data from the U.S. Energy Information Administration on Aug. 3 showed yet another below-average build of 20 Bcf for the week ended July 28, which reflected hot weather and high cooling demand in the major consuming centers of the U.S.

However, the otherwise supportive storage data was overshadowed by bearish tints, including current weather forecasts that show large areas of below-normal temperatures over the next two weeks.

"The natural gas has probed fresh lows for the week on a somewhat cooler temperature forecast than a day ago, but looks to be finding at least some buying interest at the lower levels on possible profit taking by the bears to sidestep any bullish surprises in the weather outlook that might occur over the weekend," Citi Futures analyst Tim Evans wrote in an Aug. 4 report to clients.

However, analysts with Tudor, Pickering, Holt & Co. said they do not expect to any change to the recent price pressure as a "combo of peak summer weather now likely in rear-view mirror (last week is historically the hottest of the year) and mild near-term weather forecast effectively removes weather-risk premium."

"Slight but ongoing production growth likely adds weight keeping prices below $3/mmbtu," the analysts wrote in an Aug. 4 email to clients. "Weather adjusted market continues implied at 4 bcfd undersupplied ... in-line sequentially and above the 3 bcfd+ undersupplied trend seen earlier in the year."

Absent weather-related demand support going forward, market participants are beginning to anticipate a reprise of larger storage injections, perhaps as early as next week's report, as the EIA's latest "Natural Gas Weekly Update" for the week to Aug. 2 shows an 8% week-on-week decline in power burn that drove a 3% reduction in total U.S. gas consumption.

Despite a slower-than-average pace of injections so far this refill season, the latest storage report also showed that inventories topped 3,000 Bcf for the first time since Jan. 6, marking only the third time that working gas storage breached the 3.0 Tcf threshold this early in the refill season. Prior to 2012, working gas stocks typically did not pass the 3.0 Tcf mark until September.

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 a three-day natural gas product covering Aug. 5-7 was swept lower as demand is called to drop during the weekend break.

Losses were especially large in New England, where Algonquin dropped more than 50 cents to an index below $2/MMBtu. Losses were less extreme at Transco Zone 6 NY, which fell about 15 cents to average near $1.70/MMBtu, and Tetco M3, which fell a little more than 20 cents to average near $1.50/MMBtu.

In the Midwest, losses at Chicago were kept to less than 10 cents with an index near $2.65/MMBtu, and in Louisiana, the benchmark Henry Hub lost just a few cents to an index near $2.75/MMBtu.

In the West, spot gas markets pulled back despite lingering heat as Malin and PG&E Gate kept the losses to less than 10 cents to indexes near $2.50/MMBtu and $3.20/MMBtu, respectively. SoCal prices were down more than 20 cents to an average near $3.15/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, natural gas and coal index prices, as well as forwards and futures, visit our Commodities Pages.