July 27th, 2012

Natural-gas futures tumbled 3.1% to their lowest settlement price of the week as traders rushed to close out contracts for August delivery before they expired at the end of session Friday.

Natural gas futures for August delivery on the New York Mercantile Exchange settled 9.5 cents, or 3.1%, lower, at $3.010 a million British thermal units. The most-active September delivery settled down 7.5 cents, or 2.4%, at $3.015/mmBtu.

“It’s simply a question of book squaring,” said Tim Evans, analyst for Citi Futures Perspective. He noted that the scramble to close out positions overrode the impact of supply-and-demand factors on the market.

Forecasts for above-normal temperatures, particularly in the central U.S., boosted prices as high as $3.196/MMBtu this week due to anticipated increased demand for natural gas by utilities to power additional air conditioning. Though the forecasts remain largely unchanged, prices are now down 2.3% on the week.

The day’s selling could indicate that prices have “come off the high” of earlier this week and have farther to fall, said analyst Stephen Schork. For those betting that prices will rise, Friday’s settlement price is “not the kind of way you want to end the week,” he said.

High demand for air conditioning has prompted power generators to burn more natural gas in recent weeks, helping to eat away at the total natural-gas oversupply.

Total storage inventories now stand about 15.8% above the five-year average for this week. Stockpiles swelled to 60% above the five-year average earlier in the year after a mild winter didn’t require much natural gas to heat homes and businesses.

The shrinking inventories have caused some analysts to raise their expectations for natural-gas prices.

Barclays has revised its forecast for the average price in the third quarter of the year to $2.70/MMBtu, up from $2.05/MMBtu, due to high weather demand in recent weeks.

“The surge in power demand is causing some market watchers to lose their fear of the storage overhang,” the bank said in a note, adding that July 2012 is on pace to be 24% hotter than average.

Goldman Sachs also disclosed a revised forecast, to $2.90/MMBtu from $2.10/MMBtu. Morgan Stanley has raised its forecast for natural gas’s 2012 average price to $2.74/MMBtu from $2.40/MMBtu.

Nymex Aug         $3.010           -9.5c
Nymex Sep         $3.015           -7.5c
Nymex Oct         $3.039           -6.7c

CASH HUB          RANGE            PREVIOUS DAY
Henry Hub         $3.06-$3.12      $3.085-$3.15
Transco 65        $3.055-$3.085    $3.08-$3.175
Tex East M3       $3.19-$3.32      $3.35-$3.52
Transco Z6        $3.21-$3.32      $3.40-$3.56
SoCal             $2.96-$3.07      $3.02-$3.10
El Paso Perm      $2.875-$2.94     $2.96-$3.00
El Paso SJ        $2.80-$2.80      $2.91-$2.935
Waha              $2.97-$3.03      $3.05-$3.07
Katy              $3.00-$3.08      $3.08-$3.14

Nicole Friedman at Doew Jones.