HOUSTON (Dow Jones)--Natural gas futures moved higher as forecasts called for a steamy holiday weekend and the chances improved for an area of low pressure off Mexico and south Texas to develop into a tropical storm.
Natural gas for July delivery settled 2.7 cents, or 0.6% higher, at $4.256 a million British thermal units on the New York Mercantile Exchange.
The benchmark contract settled higher for the second straight session after falling to a 30-day low Thursday.
Futures "appeared to garner some support" from forecasts for above-average heat expected to arrive in major Midwestern and East Coast markets this week, said Ritterbusch and Associates.
"However, this warm up is expected to be followed by a return to normal temps next week across the mid-continent and northeast regions," the Galena, Ill., trading advisory wrote in a note to clients.
In their seasonal outlook private forecasters with Commodity Weather Group said that July is likely to be warmer than previously thought, though not as hot as last summer when sweltering conditions lifted demand for gas to power air conditioners.
"Our updated July outlook in the past two weeks is still nowhere near as cool as the original expectation, but it does continue to shed cooling degree days, and it is quite a bit cooler than July 2010," the meteorologists said.
Meanwhile, market participants are eyeing the tropics where the National Hurricane Center said Monday that there is a 30% chance that a "broad area of low pressure" over the Mexico's Bay of Campeche could become a tropical cyclone within the next 48 hours.
Energy traders track tropical weather in the event it disrupts production in the Gulf of Mexico. Yet in recent years the importance of Gulf production has diminished as output from onshore fields has increased.
In 2005, gas from the Gulf accounted for 16.5% of total U.S. output but by last year it had fallen below 10%, according to Energy Information Administration data. During the first three months of this year, the most recent data available, the Gulf has contributed just 7.4% of total U.S. production.
As such, a storm large enough to significantly curtail offshore production can also shut down big gas users along the Gulf coast power plants, refineries and chemical manufacturing plants, said Rick Smead, director for Navigant Consulting in Houston. "You lose more demand than supply," he said.
