Rising temperatures in many areas and relatively attractive gas prices continued to boost gas demand for power generation Tuesday, prompting additional gains of 10-40 cents in the cash market. An early run-up in futures also helped continue the cash rally but the near-month futures contract ended up losing nearly all of what it had gained by the end of trading Tuesday afternoon.

August futures ended at $5.633, up 2.5 cents after hitting a high of $5.85 (see related story). Near-month crude oil futures settled at $74.16, up 55 cents.

“Cash prices were quite a bit stronger today, both fixed price and basis,” said a Chicago area trader. “The heat was the main factor. High temperatures are expected to average about 87 in Chicago with lows around 70 degrees for the next week or so with the hottest times on the weekend, which might smooth out the weekend dip. Nymex also was up this morning but came back down near its lows after cash trading ended.

“Chicago was up about 20 cents and basis tightened more than a dime to about 22 under August futures,” he said. “Basis was minus 35 cents yesterday and was even wider last week.

“With cash prices where they are right now relative to next month there’s less of an incentive to put gas in storage. I think we could see Chicago get even tighter to the Nymex this week. This heat may save us if it keeps up.”

MichCon was among the weaker locations in the Midwest, posting a gain only in the mid teens. Gas flows into MichCon have waned considerably this month due to high storage levels and shipper restrictions. Bentek Energy reports MichCon gas flows are down 63% month to date compared to July 2005. On Tuesday, flows were off 33% to only 110 MMcf/d.

“MichCon told transportation customers that if they had 10% of their annual contract quantity in storage at the end of May they couldn’t bring in any gas in the month of July,” a regional marketer said. “Their storage is high so that’s why there’s a lot less gas going into their system. It’s unfortunate because prices have been lower this month. There hasn’t been a lot of cooling load up here, but we are expected to get into the 90s this weekend.”

Temperatures were in the 80s and 90s across much of the U.S. on Tuesday, and readings in the 90s and even 100s will bake the Plains (and much of Minnesota) on Wednesday as a multi-day heat wave cranks up, the Weather Channel reported. Much of the South will be hot and humid with little or no precipitation. Triple-digit heat will sear much of southern and West Texas as well as southwestern Oklahoma. Much of the West also will be warm, or hot, and dry with only isolated storms dotting the Rocky Mountain region.

Permian prices jumped nearly a quarter Tuesday and SoCal Border gained even more, but most other western points were up about 10-15 cents. “The Malin-to-SoCal spread was working Tuesday at more than 25 cents,” said a western marketer. “There was some tightening in the Pacific Northwest spreads, however. Southern California was kind of the driver today; it was pretty strong.”

Most of the large gains Tuesday were in the Northeast where many market points moved up more than 30 cents. New York Citygate posted a 31-cent gain and Algonquin jumped more than 40 cents. “We have probably a 65-cent basis in the Northeast markets. It’s nothing crazy, but plus 65 cents is probably the best we’ve seen this month so far,” said a northeastern marketer. “We are seeing a little bit of heat come in. New England is expected to get some rain but it’s pretty hot and humid everywhere else. Based on the weather forecasts I would think basis may widen further. It’s supposed to get to 95 degrees in New York next week so I see no let-up in the heat.”

The National Weather Service’s six-to 10-day forecast shows a broad area of above normal temperatures across most of the United States except for the Southeast, South Atlantic, Gulf Coast region and the southern half of Texas. No below normal readings are expected in the Lower 48 states.

While the heat appears likely to put more pressure on basis, the storage situation may continue to dictate the overall price direction. Early predictions for this week’s storage report are in the 70s Bcf. Last week’s injection was 73 Bcf. Consultant Ron Denhardt said he’s expecting a 78 Bcf injection compared to 70 Bcf last year and a five-year average of 92 Bcf.

“If weather adjusted storage injections continue at 1.9 Bcf/d less than last year, natural gas storage would still end the injection season at 3.8 Tcf,” said Denhardt. “Extremely hot weather could reduce this level by 100-200 Bcf and hurricane activity equal to last year could reduce storage an additional 300 Bcf. However, loosing 100 Bcf to hurricane activity is more likely… So even under extreme circumstances working gas storage is likely to end at 3,500 Bcf unless the supply-demand balance tightens further.

“While many have indicated that the declining storage surplus versus last year is a positive sign, in our view the market has to tighten substantially to prevent prices from dropping to $5.00/MMBtu or less before then end of the [cooling season].” Denhardt said he believes $5 currently is a “minimum price level for gas to move out coal.” However, as the fall season approaches that competitive price threshold goes down and by October will be “well below $5.”

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