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Weather Models Move Forecast Heat East; August Called 5 Cents Higher

August natural gas is set to open 5 cents higher Tuesday morning at $2.98 as weather models slide forecast heat in a more easterly direction and storage surplus contraction is back in play. Overnight oil markets fell.

Weather models overnight migrated near-term heat more into the East. "Forecast changes were mixed, leaning hotter in the Midwest at mid-period and in the East late while the South-Central is cooler," said MDA Weather Services in its morning six- to 10-day report to clients. MDA calculations show the period averages aboves for most of the West and into the Midwest, with perhaps some additional hotter risk being focused around mid-period in the Midwest when ridging is strongest overhead.

"The East likewise favors a round of aboves coming in late in the period; although, seasonal readings are seen here from early to mid-period. Texas is generally near normal overall, while seasonal readings return to parts of the Southwest in the second half tied to monsoon activity." Risks to the forecast include temperatures [peaking] additionally hotter in the Midwest in the mid-period and Mid-Atlantic late. Risks are mixed in the Southwest, where monsoonal moisture lowers confidence, MDA said.

The forecast warmth has analysts going long and looking for further storage surplus contraction. "Although the above normal views are not showing extreme deviation from usual tendencies, warming trends are broad based across a large portion of the U.S., a prospect that appears capable of boosting” cooling degree day “accumulation significantly," said Jim Ritterbusch of Ritterbusch and Associates in a morning report to clients.

"As a result, the dynamic of surplus contraction appears to be back on with resumption expected on Thursday where we expect a supply build some 10-12 Bcf smaller than the five year average increase of about 72 Bcf. While our technical indicators are providing a mixed bag, lack of significant chart resistance until about the $3.12 area per nearby futures could help to facilitate a return to a $3 price handle toward the front of the gas curve.

"We shifted off of a neutral and into a bullish near term trading stance following last Wednesday's sharp price drop into our suggested buy zone of $2.87-2.92 per nearby gas futures. We are advising stop protection below the $2.80 level on a close only basis. Our upside price target exists to the $3.12 level with any sustainable hot weather patterns capable of an eventual advance into the $3.22-3.25 zone. But given the magnitude of early July price selloff, we will be reviewing our stance closely following Thursday's EIA [Energy Information Administration] release."

In overnight Globex trading August crude oil fell 34 cents to $44.06/bbl and August RBOB gasoline shed a penny to $1.4864/gal.

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