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Traders Juggle Supply, Demand; August Seen 5 Cents Lower

August natural gas is expected to open 5 cents lower Friday morning at $2.68 as traders reassess the likely impact of expected hot weather along with increased production and fuel switching. Overnight oil markets rose.

Traders don't see the expected heat as providing enough impact to maintain any kind of upward momentum to prices. "Although updates to the short-term temperature views that we monitor are still favoring above-normal trends that will likely be stretching to month's end via weekend updates, deviations from normal still don't appear sufficient to sustain occasional price advances," said Jim Ritterbusch of Ritterbusch and Associates.

"The market received an additional piece of bearish guidance yesterday in the form of a much larger than expected 64 Bcf storage injection that forced only a minor reduction in the sizable supply overhang. While the dynamic of surplus contraction is apt to remain intact through the rest of the summer, rate of decline is beginning to appear slower than we had anticipated. Some of this dynamic appears related to the recent lift in production as well as some gas to coal displacement that has resulted from the recent advance in gas prices."

Gas buyers having to make incremental purchases for power generation across the PJM footprint will have only moderate wind generation to supplement purchases. "Changeable mid-summer weather is expected," said forecaster WSI Corp. in a Friday morning report. "Partly sunny, hot and less humid conditions are expected across the I-95 corridor today with highs in the upper 80s to mid 90s. A more seasonable and drier air mass will filter into western PJM and this will overspread the majority of the power pool by Saturday, though there will remain a chance of a pop-up shower across the lower Mid-Atlantic. A developing southwest flow ahead of an approaching cold front will begin to cause warm and humid conditions to return during Sunday.

"A west-northwest breeze behind a cold front will promote modest wind generation today with output around 1-2 GW. Wind gen should become weak during Saturday, but the cold front will cause output to briefly increase in excess of 2 GW during Sunday into Monday."

In overnight Globex trading August crude oil rose 15 cents to $45.83/bbl and August RBOB gasoline gained a penny to $1.4258/gal.

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