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Tropical System Upgraded; July Expiration Upbeat

July natural gas futures expired on a firm note Tuesday as traders had to factor in a slightly higher weather premium as a tropical system was upgraded and near-term weather forecasts called for warm temperatures. At the close July natural gas rose 10.1 cents to $4.357 and August added 9.0 cents to $4.354. August crude oil surged $2.28 to $92.89/bbl.

The National Hurricane Center (NHC) upgraded its assessment of a low-pressure system over the southernmost Gulf of Mexico. At 4 p.m. EDT NHC reported cloudiness and showers associated with a broad area of low pressure over the Bay of Campeche. It said showers and thunderstorms were not sufficiently organized to designate the system as a tropical depression at this time, but it gave the system a 90% chance of becoming a tropical cyclone in the next 48 hours as it moved to the west-northwest at five to 10 mph.

Near-term forecasts calling for a Midwest warmup are likely to add a firm tone to the market, but longer term, Jim Ritterbusch of Ritterbusch and Associates is looking for "temperature forecasts to generally steer pricing as this summer proceeds. The upcoming forecast for hot temps across much of the Midcontinent later in the week will likely rein in next week's storage injection. But we feel that the market will be looking further down the road to a return to more seasonal patterns next week and a significant Midwest cool-off into the second week of July."

In its six- to 10-day forecast, MDA EarthSat predicts above- to much-above-normal temperatures east, south and west of a broad arc extending from northwest Ohio to the Panhandle of Texas to central Montana. "The major themes of the forecast are still consistent with [Monday], though there were some hotter changes made. These changes included longer-lasting heat at the onset in parts of the Midwest as well as stronger heat in much of the East during the first half of the period," the firm said in its morning report.

"The West should still see plenty of 'much-aboves' early on as well, though this area was held mostly similar to [Monday]. Some eventual cooling trends are likely over the northern Plains and Upper Midwest late, an area that correlates well with the [North American Oscillation and Arctic Oscillation] during July. Confidence was inched upwards today."

Last year 63 Bcf was injected into underground storage and the five-year average stands at 77 Bcf, according to government figures. After last week's unexpectedly plump 98 Bcf build report, bears are contending that it will be difficult not to narrow the historical storage deficit. "Most weather models would appear to favor some narrowing in the supply deficit going forward into next month, a dynamic that will maintain focus on an increasing pace of production," said Ritterbusch.

According to reports, financial powerhouse Goldman Sachs has taken a bullish stance on the European gas market, thus avoiding the abundant North American supply dynamic. "We recommend opening a long position in the UK NBP [National Balancing Point] Q4 2012 contracts as we expect a continued tightening of global LNG markets to lead to a reconnection between spot prices and oil-indexed prices in Europe, with spot gas pricing above oil-indexed in the beginning of the winter to attract incremental volumes for the peak demand period. This reconnection between spot and oil-indexed natural gas prices in Europe is not currently priced in the UK NBP forward curve," Goldman said.

"The reason they are recommending going long UK is that you can't take surplus gas from the U.S. and distribute it around the world," said Tom Saal, vice president at Hencorp Futures in Miami. They are taking the view that they would rather be long a market that reflects the non-North American price and have chosen the UK NBP price."

Saal mentioned that the trade was a rather routine seasonal one and that it was unusual for Goldman to recommend such a contract inasmuch as "they don't have any position limits over there and it's less liquid. There are likely execution issues."

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