On the New York Mercantile Exchange, natural gas futures for delivery in August traded at USD3.117 per million British thermal units during U.S. morning trade, dropping 1.7%.
It earlier fell by as much as 1.8% to trade at a session low of USD3.110 per million British thermal units. The front-month contract rallied to USD3.194 on Tuesday, the highest since December 28, 2011.
The August contract is due to expire at the end of trading on Friday, July 27.
Meanwhile, the more actively traded contract for September delivery tumbled 2.2% to trade at USD3.106 per million British thermal units. The September contract fell by as much as 2.4% earlier to trade at a session low USD3.101.
A bout of hot weather across much of the country over the last several weeks helped boost natural gas prices. Spot prices have rallied nearly 45% in the past five weeks, as extreme heat conditions across the U.S. boosted cooling demand for the fuel.
The recent gains helped push natural gas futures into positive territory for 2012. The fuel is now up 4.5% in 2012. Concerns over bloated inventories and weak winter demand dragged prices down to a decade low of USD1.907 per million British thermal units on April 19.
The National Weather Service's six-to-ten-day outlook issued on Monday called for above-normal temperatures for much of the eastern two-thirds of the nation.
Warmer-than-normal temperatures increase the need for gas-fired electricity to power air conditioning, boosting demand for natural gas. Natural gas accounts for about a quarter of U.S. electricity generation.
But the sharp gains prompted investors to sell positions to lock in profits, amid ongoing concerns over elevated U.S. storage levels.
Market players shifted their focus to the U.S. Energy Information Administration’s closely-watched weekly report on natural gas inventories scheduled for Thursday.
Early injection estimates range from 21 billion cubic feet to 50 billion cubic feet, compared to last year's build of 48 billion cubic feet. The five-year average change for the week is an increase of 61 billion cubic feet.
Total U.S. gas supplies stood at 3.163 trillion cubic feet last week, 19.2% above last year's level and 17.5% above the five-year average level for that week.
U.S. gas inventories did not hit the milestone 3 trillion cubic feet level until August 31 of last year. Stocks peaked last year in November at a record 3.852 trillion cubic feet.
Market analysts have warned that without strong demand through the rest of the summer, gas inventories will reach the limits of available capacity later this year.
The storage surplus to last year will have to be cut by at least another 260 billion cubic feet in the 17 weeks left before winter withdrawals begin to avoid breaching the government's 4.1 trillion cubic feet estimate of total capacity.
From a technical standpoint, market participants noted that prices have further room to move higher after futures closed above the key USD3.00-level for the first time since January.
The USD3.00-level is psychologically important to some traders, who see that price as the point at which power plants will begin switching from natural gas to coal.
Speculation that utility providers in the U.S. were switching from pricier coal to cheaper natural gas helped boost prices off a 10-year low of USD1.902 hit in mid-April.
Elsewhere on the NYMEX, light sweet crude oil futures for delivery in September dipped 0.15% to trade at USD88.36 a barrel, while heating oil for August delivery shed 0.3% to trade at USD2.815 per gallon
U.K. natural gas gained as imports from Norway declined, tightening supplies into the network.
Within-day gas rose for a second day, climbing as much as 2.5 percent to 54.8 pence a therm in London, according to broker prices compiled by Bloomberg. August gas added 0.6 percent to 53.7 pence a therm. That’s equivalent to $8.31 per million British thermal units and compares with $3.072 per million Btu for front-month U.S. gas.
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