US natural gas futures edged lower on Wednesday on midday forecasts calling for less hot weather for the next two weeks as the market waits for direction from the federal government's weekly storage report on Thursday. Earlier Wednesday, futures hit a 13-month high after the front-month rolled to the higher-priced August contract and as some analysts estimated that an explosion at a major gas-processing plant in Pascagoula, Mississippi, could reduce storage injections in coming weeks.
After rising 29 percent over the past five weeks due to a hotter-than-normal start to the summer, gas futures for August delivery fell 2.7 cents, or 0.9 percent, to settle at $2.863 per million British thermal units on their first day as the front-month. Earlier Wednesday, August futures climbed to $2.974, their highest level since May 2015. The strong 7 percent gain in July futures before expiration pushed July into backwardation versus August for the first time. It also pushed August futures into backwardation versus September for the first time since January.
"This backwardation is sending off some strong bullish vibes, and when combined with technical indicators, additional price gains to as high as the $3.10 area appear quite realistic," Jim Ritterbusch, president of Chicago-based energy advisory Ritterbusch & Associates, said in a note.
Despite the recent rally, analysts said spot prices so far in 2016 have remained relatively low, pressuring producers to cut output and encouraging generators to burn more gas instead of coal to prevent storage caverns from filling to maximum capacity. A warm winter left inventories at record highs.
Spot prices at the Henry Hub benchmark have averaged $2.05 so far this year, while futures for the balance of 2016 were fetching $2.98, a 10-month high. That compares with $2.61 in 2015, the lowest since 1999. Analysts, however, said no one expected storage caverns to reach maximum levels this autumn because injections since April have remained low after the power sector burned more gas and producers reduced output. In early estimates, analysts forecast that utilities added just 45 billion cubic feet of gas into storage during the week ended June 27. That compared with builds of 62 bcf in the prior week, 73 bcf a year earlier and a five-year average of 78 bcf.
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