Natural gas rides heat wave, but not for long
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 (NGU2) , 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.
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 (UNG) , 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.