July natural gas is expected to open 5 cents higher Monday morning at $2.67 as traders factor in extreme heat in Southern California and its likely impact on supply. Overnight oil markets gained.

Risk managers suggest that now is the time to implement an options-based hedging strategy. “Natural gas closed the week 3.5% higher, which was the fourth consecutive week that prices have settled in the positive,” said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm. “[Last] week’s trading range of $2.53-2.64 was much tighter than the past few weeks, and although the market was not very volatile, the higher highs and higher lows kept the uptrend intact.

“Spot month gas prices haven’t been this high since September 2015. Futures prices have been primarily supported by expectations of hotter weather and short-covering. Cash gas daily prices had been lagging but saw significant increases this week, with El Paso-Blanco prices increasing from $2.13 last weekend to $2.60 this weekend. SoCal Citygate increased from $2.32 to $3.02 during the same period as cooling demand in the Southwest shoots higher. We still feel that we are at levels that represent attractive levels for producers to start to establish forward sales. But since we are not bearish, we would establish hedges with either floors or collars.”

DeVooght currently recommends that trading and end-user accounts stand aside, but physical market longs should “hold an August-July $2.70 put and short a $3.50 call at flat or hold a $2.75 put and short a $3.75 call paying 7 cents.”

Gas buyers for power generation across the Southwest will have their hands full Monday. “Extreme heat will impact the Southwest on Monday, while a cold front shifts across the Great Lakes,” said Wunderground.com meteorologist Keri Strenfel. “A large ridge of high pressure will build over the southern Plains and the Southwest. Temperatures will spike above 110 degrees across many locations stretching from southern California to the Four Corners, [and] portions of the Desert Southwest will hit 120 degrees during Monday afternoon.

“Excessive heat warnings are in effect for southern California, southern Nevada, Arizona and parts of Utah. Heat advisories are also in place for central Nevada and southwest New Mexico. Relatively cool air will linger over the Pacific Northwest. Daytime heating will trigger isolated showers and thunderstorms in portions of Washington.”

In overnight Globex trading July crude oil added 97 cents to $48.95/bbl and July RBOB gasoline added 3 cents to $1.5365/gal.