Heat Wave Boosts Natural Gas Prices; Futures Jump 14 Percent

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Natural gas futures surged 14 percent to a three-month high on Monday, rallying on strong demand from power producers amid scorching temperatures across the Midwest and Northeast.

Oil prices also rose as fighting between Israel and Hezbollah raged on, keeping traders tense about a possible Mideast supply disruption.

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The U.S. heat wave drove up demand for natural-gas-fired electricity as consumers cranked up their air conditioners. That sent September Nymex natural gas futures $1 higher, to $8.185 per 1,000 cubic feet. The last time front-month natural gas futures settled above $8 was April 20.

The upper Midwest and Plains were steamy, with numerous heat warnings in place from Michigan to Oklahoma. Forecasts for above-normal highs were posted along the East Coast, where triple-digit readings were in the offing by midweek from the Carolinas through southern New England.

Utilities asked homeowners to conserve electricity by not setting their thermostats too low, and by postponing the use of major appliances until the off-peak evening hours.

The Edison Electric Institute, a trade group for the electric sector, said last week that the U.S. set a record for electricity demand for the week ending July 22. The Energy Department last week surprised the market by reporting that U.S. inventories of natural gas shrank by 7 billion cubic feet. Supplies typically build during summer.

Still, the country's natural gas inventory is well above historical levels at 2.76 trillion cubic feet. The five-year average for this time of year is 2.27 trillion cubic feet.

Analyst Dan Lippe of Houston-based Petral Worldwide believes that, barring any major hurricane damage to platforms and pipelines, natural gas prices could fall sharply in September. "You will see (U.S.) storage facilities full well before the last week of October," Lippe said.

Light sweet crude for September delivery rose $1.06 to $74.30 on the New York Mercantile Exchange. September Brent crude futures at London's ICE Futures exchange rose 66 cents to $74.05 a barrel.

Oil prices have been choppy in recent weeks, but BNP Paribas Commodity Futures broker Ric Navy said the market could be setting up for a big move.

"The longer you go sideways, the bigger the breakout when it occurs," Navy said. "And at this point, the long-term trend is still higher."

Navy said traders could easily become more anxious in the weeks ahead, with the Gulf of Mexico hurricane season expected to pick up and the nuclear standoff between the West and Iran expected to come to a head in late August.

The U.N. Security Council passed a resolution Monday giving Iran until Aug. 31 to suspend uranium enrichment or face the threat of economic and diplomatic sanctions. Iran immediately rejected the council's demands, which were watered down from earlier drafts because of Russian and Chinese demands.

Oil traders have been focused for nearly three weeks on the violence between Israel and Hezbollah guerrillas in Lebanon, fearful of possible supply interruptions in the region. Iran, OPEC's No. 2 supplier, is a backer of Hezbollah.

An Israeli airstrike Sunday killed at least 56 Lebanese, mostly women and children, when it leveled a building where they had taken shelter. Israel agreed to a 48-hour suspension of aerial activity over southern Lebanon afterward, but the brief respite ended when Israeli planes hit targets in southern Lebanon on Monday after Hezbollah guerrillas blasted an Israeli tank and injured three soldiers.

More than 500 Lebanese and 50 Israelis have been killed since the fighting broke out on July 12.

Sunday's attack prompted U.S. Secretary of State Condoleezza Rice to cut short her Mideast diplomatic mission. Lebanese Prime Minister Fuad Saniora demanded a cease-fire and said talk of a larger peace package must wait until the firing stops.

Paul Harris, head of energy at Bank of Ireland Global Markets in Dublin, said Brent crude prices would likely move on developments in the Israel-Lebanon conflict and would respond to any progress in diplomatic efforts to end the violence.

In other Nymex trading, gasoline futures dropped more than a cent to $2.22 per gallon and heating oil futures were up less than half a cent to $1.9450 per gallon.

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