Cash natural gas prices vaulted higher Thursday on average by 15 cents. Oppressive heat over much of the country was cited as driving prices higher, but on the West Coast traders attributed the higher quotes to a stronger screen. At the close of futures trading the August contract had gained 4.6 cents to $2.945 and September had posted an advance of 3.9 cents to $2.950. August crude oil slipped 44 cents to $87.22/bbl.

Midwest buyers said higher power generation requirements were causing increased use of natural gas. "We are on our third or fourth day of near-100 degree days," said a Nebraska utility buyer. He said one of his company's normal power generation customers wasn't buying all that much gas but had elected to buy gas on its own to run a combustion gas turbine.

"They have a gas turbine plant and they are transporting their own gas. If it gets extremely hot, they turn that thing on and don't go through us. It costs so much money to turn the thing on that once they hit that point where it's a breakeven, they will turn it on. We are not the primary peak loader anymore. We are just a supplemental peak provider."

Brutal heat continues to bake much of the nation's mid-section. Meteorologists reported that below the area of high pressure promoting the heat the air will become stagnant across much of the country. "St. Louis, Kansas City, Chicago and Nashville still lie in the heart of the dangerous heat wave this week as the heat challenges long-standing record highs. With high humidity factored in for cities like Kansas City and St. Louis, AccuWeather RealFeel temperatures will soar to very dangerous levels of 110-115 degrees," said AccuWeather.com meteorologist Meghan Evans.

Heat records are falling like dominoes. "Highs are forecast to soar into the 90s in Detroit into the weekend. If the city manages to hit 90 degrees and higher through Saturday, as forecast, then the city will fall one day short of the longest streak of 90-degree temperatures ever recorded. The longest stretch of consecutive days at 90 degrees or higher for Detroit was 11 days set back in 1953."

Quotes across the Midwest rose by double digits. Michcon and Consumers rose by more than a dime, and Northern Natural Gas Ventura next-day gas was up nearly 15 cents. At the Chicago Citygate quotes were more than a dime higher.

West Coast traders reported milder conditions and attributed increases in next-day gas to Nymex. "It's just Nymex. On Friday we'll typically see a lower number and then prices will rebound on Monday. It's doubtful that tomorrow [Friday] will continue that trend," said a northern California trader. "Loads are milder and it's very cool in San Francisco. Yesterday on the Fourth of July it was cold."

Next-day gas at PG&E Citygate and Malin added close to a dime. At SoCal Citygates and SoCal Border prices were up nearly 15 cents.

Gulf points also scored double digit gains. ANR SE, Columbia Gulf Onshore, Trunkline E LA, Henry Hub and Tennessee 500 L were all up a dime or more.

Futures traders are not convinced of the market's rally. "We are not super enthused by this, because all the rallies come on stable or declining open interest," said a Washington, DC, broker. "The first rally from mid-April to mid-May was all just short covering in our view. There was a sell-off for a couple of weeks and open interest stayed steady, and I suspect the open interest has started decreasing. I am not enthusiastic that this is a super, new bull market.

"If we get closer to $3, I suspect we'll start seeing loss of demand back to coal again so that tends to cap things for the moment."

The storage surplus keeps dwindling, and analysts see the current reduction in the surplus as a function of an extensive gas burn by power generators. Their contention is that coal-to-gas switching has been so prevalent that without it, the storage builds would be significantly higher. "The coal-to-gas switching debate has been raging for months. How much is happening? How long will it last? Could switching continue to increase? Will the generators save the gas producers from themselves?" said Rusty Braziel in his blog at RBNEnergy.com.

"So far this year, that latter assertion seems to be the case. Additions to natural gas power burn by electric generators have been about the only thing propping up natural gas prices. If the generators weren't burning so much gas, the storage surplus would be through the roof. Last week EIA [Energy Information Administration] announced that natural gas matched coal's share of U.S. generation for the first time in April [see Daily GPI, June 28]. That's a big deal."

Going forward, perhaps the larger question is what happens when heating requirements impact power generation. Is production so high it can satisfy both? Any collision is likely going to require a price adjustment.

Longer-term weather forecasts are calling for continued above-normal temperatures across prime energy markets. In its 11-15 day outlook WSI Corp. of Andover, MA, predicts above-normal temperatures throughout the northern half of the country including Nevada and portions of northern California. "Temps will run above normal across most of the nation with the warmest anomalies in the Midwest. [Thursday's] forecast is warmer over much of the northern tier of the nation compared to the previous forecast."

Risks to the forecast include temperatures trending warmer "in the Midwest and East as subtropical ridging is poised to expand and intensify during the third week of July."

The most recent data from the Commodity Futures Trading Commission shows a large exodus by directional traders holding short positions. In its Commitments of Traders Report as of June 26, holders of long positions at IntercontinentalExchange (2,500 MMBtu per contract) increased holdings of long futures and options by 7,113 to 725,332 and decreased shorts by 32,395 to 123,415. A similar pattern emerged at Nymex. Long futures and options (10,000 MMBtu per contract) rose by 1,931 to 195,676 and short holdings fell by 23,092 to 248,354. When adjusted for contract size, long contracts at both exchanges increased 3,709 but short positions fell a stout 31,166.

For the five trading days ended June 26 August futures added 23.3 cents to $2.807.

©Copyright 2012 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.