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Cooling Trends Eyed; Expiring August Seen A Penny Lower

The expiring August natural gas contract is expected to open a penny lower Wednesday morning at $2.70 as traders factor in both near-term and longer-term cooling trends. Overnight oil markets were mixed.

Tim Evans of Citi Futures Perspective sees the market moving lower as cooling demand subsides and storage injections increase. "While hot summer temperatures remain a current support for the market, we continue to see the seasonal cooling trend that will follow as a bearish factor, at least relative to the prevailing price level.

"Expectations for Thursday's DOE storage report for the week ended July 22 are still being compiled by the major newswires, but estimates we've seen so far suggest a consensus running in the vicinity of 30 Bcf in net injections. This would be a modest decline from the 30 Bcf refill in the prior week and a supportive contrast with the 52 Bcf five-year average gain.”

Evans’ own estimates are for a 24 Bcf build, and he suggests this sets the market up for a bullish surprise. His figures show that by Aug. 12, the year-on-five-year storage surplus could fall from its present 559 Bcf to 428 Bcf.

Evans says he wouldn't "rule out" a continuation of this trend, although at present he doesn't have a specific forecast that would enable those calculations. "This declining surplus confirms that the market is becoming tighter on a seasonally adjusted basis, which most often translates into rising prices over the intermediate term."

Once cooler temperatures set in, power sector demand is likely to lessen. "We think this weakening of current demand may allow the market to fall to the $2.40-2.50 range in the weeks ahead, which we view as a more appropriate discount to last year's valuation given what was still a 471 Bcf year-on-year storage surplus as of July 15,” Evans said.

Evans is currently on the sidelines awaiting a new, limited-risk trade entry.

Weather-wise, look for brief respite from eastern heat followed by a return of warmth by next week. "Fresh midday weather data continues streaming in and again no major changes in the latest weather data, although there remain important differences between some of the major weather models on just how hot the first half of August will play out," said Natgasweather.com in a noon update.

"To our view, regardless, it will be very warm to hot with stronger than normal nat gas demand.  Until then, after a hot start to the week, cooler temperatures will spill across the Great Lakes and Mid-Atlantic over the next several days due to a weather systems with showers and thunderstorms tracking through. This cooler period will last through the coming weekend, easing natgas demand from recent very high levels to just slightly above normal even though it remains quite hot and humid with 90s and 100s over the western, central, and eastern U.S.

"However, as expected, early next week the hot upper ridge will bounce back with increasing strength, while also expanding back across much of the northern and eastern U.S. to bring another several day period of very strong nat gas demand around Tuesday through Friday of next week."

In overnight Globex trading September crude oil fell 11 cents to $42.81/bbl and September RBOB gasoline gained a bit to $1.3449/gal.

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