Wednesday, July 25, 2012

Natural gas up 44% from the lows

The temperature forecast for the US is not looking great. The bulk of the nation is expected to have above normal temperatures in August exacerbating the drought conditions. This weather pattern has been driving up agricultural commodity prices but is now also impacting natural gas valuations. As residential and corporate electricity users crank up the air conditioning, the demand for power goes up, pushing utilities to burn more natural gas.

Probability of temperature being above normal in August (Source: NOAA)

The amount of gas in storage is still rising and the market is still oversupplied, but the inventory is approaching the 5-year range for this time of year.

Gas inventories vs. 5y range: (source: EIA)

This trend is giving natural gas price a boost, with the futures rising above 3 dollars. This increase may not seem like much, but consider the fact that the nearby futures contract is up 44% from the lows - mostly driven by the ongoing heat wave.

Nat gas futures
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