Natural gas hits a three-week high on warm weather forecasts

Natural gas futures extended gains on Tuesday as weather forecasters continued to predict above-average temperatures in key U.S. consuming areas, thus boosting the power plant fuels demand prospects.

On the New York Mercantile Exchange, natural gas for September delivery traded at $3.490 at 14:53 GMT, marking a 0.77% daily advance. Prices held in range between days high and low of $3.499, the highest since July 26, while days low stood at $3.437. The September contract rose 3% on Monday and extended its weekly gain to over 3.5% so far after advancing 4.5% the preceding five-day period.

Natural gas continued to rally on Tuesday as weather forecasting models kept pointing at above-normal temperatures in key consuming U.S. areas. According to MDA Weather Services in Gaithersburg, Maryland, weather from the U.S. Northeast to the West Coast should remain warmer than average through September 2. Temperatures in the Midwest and the northern Great Plains may be 3 to 8 degrees Fahrenheit higher than usual between August 24 and August 28.

When higher-than-normal temperatures are expected, natural gas surges as increased electricity demand to power air-conditioning calls for more supply of the fuel, which is used for a quarter of the U.S. electricity generation. According to the Energy Information Administration, power generation accounts for 32% of U.S. gas demand.

Meanwhile, also supportive for the fuel, Morgan Stanley predicted that stockpiles will be in line with the average levels for the last three years. Adam Longson and Tai Liu, Morgan Stanley analysts, wrote in a report that inventories will total 3.86 trillion cubic feet by the end of October, moving prices in the third quarter to $3.42 per mBtu and $3.69 in the last three-months of the year.

Natural gas is expected to rally this week, according to a Bloomberg survey of analysts. Eight out of 15 participants, or 53%, wagered that prices will rise through August 23, while six, or 40%, predicted it will remain unchanged and one expected a decline.

Market players are awaiting this weeks natural gas inventories report by the EIA. Early injection estimates for this Thursdays data vary between 71 billion cubic feet and 76 billion cubic feet, well above last years and the five-year average builds at 43 billion and 56 billion cubic feet respectively.