Energy Prospectus

Working gas in storage was 3,217 Bcf as of Friday, July 27, 2012, according to EIA estimates. This represents a net increase of 28 Bcf from the previous week. Stocks were 472 Bcf higher than last year at this time and 407 Bcf above the 5-year average of 2,810 Bcf.

Another bullish storage report. Looks like gas in storage will be less than 200 Bcf above 5-yr average by the time winter starts. It was 1,000 Bcf over 5-yr average in April.

I agree with this analysis. As soon as the weather cools a bit the price of natural gas should drift back to $2.50 to $2.70. My guess is that it will bottom in September or early October. If gas in storage gets back within 200 bcf of the 5-year average and we get a normal winter, then I expect gas to climb toward $4/mmbtu in Q1, 2013 - Dan

SAN FRANCISCO (MarketWatch) — Natural-gas futures rose to their second consecutive double-digit monthly gain Tuesday as the humming of air conditioners thinned supplies of the commodity, which feeds about a third of the nation’s electricity.

But analysts say the more prices rise, the harder it will be for the commodity, which competes with coal as a fuel source, to extend recent gains.

Warmer-than-usual weather has led to below-normal weekly increases in natural gas in storage. Tighter supplies have buoyed prices: futures prices rose 14% in July and have surged 68% from April’s record low of $1.91 per million British thermal units.

Natural gas for September delivery /quotes/zigman/8702463 NGU2 -0.68% , the benchmark, ended July at $3.21 per million BTUs after rising to its highest since December in the previous session. Prices have gained 7.4% this year. Read more on energy futures.

Click to Play Stocks down on day but up for JulyStocks tilted further into the red in afternoon trading, as the Dow industrials moved in a narrower range than they have all summer ahead of the month's end.
Market participants were expecting prices above $2.50 per million Btus to cut down on the use of natural gas to replace coal in power plants, but “that hasn’t been the case,” said Addison Armstrong, senior director of market research, at Tradition Energy.

July gains follow a 17% increase in the previous month to total four consecutive monthly gains. United Natural Gas Fund /quotes/zigman/8909134/quotes/nls/ung UNG -7.58% , an exchange-traded fund that tracks the commodity, also rose 14% in July.

Much of what moves the commodity is predicated on weather conditions, and the doldrums in April came at the tail-end of a warmer-than-usual winter and plentiful supplies.

“It is a pure weather bet at this point,” said Subash Chandra, an analyst at Jefferies & Co. Several weather services have predicted continued above-normal heat for key energy-consuming areas of the U.S.

Chandra project prices to average $3 at the end of the fourth quarter, however.

“There are a lot of headwinds above $3,” including power plants reverting back to coal, he said.

Overall fundamentals are weak
The weather outlook might be supportive through early fall, but besides weather, fundamental reasons to enter natural gas are minimal. Industrial demand is weak due to the economic slowdown, and supplies are still abundant, following new ways to extract natural gas.

The peak of coal-to-natural-gas switch “is probably behind us,” Tradition Energy’s Armstrong said. And, despite the below-average increases in supplies, gas in storage sites across the U.S. is likely to end the year at record levels, he said.

Armstrong forecasts natural gas prices to fall to $2.50 per million Btus likely by September and very likely by October, he said.

“The only demand is coming from seasonal weather factors,” he added. “The fundamentals continue to be bearish.”

Peak prices for the year are likely to hover around $3.45 per million Btus, Armstrong said.