On the New York Mercantile Exchange, natural gas futures for delivery in August traded at USD3.041 per million British thermal units during U.S. morning trade, falling 1.67%.
Sparking the earlier rally, the U.S. Energy Information Administration said in its weekly report that natural gas storage in the U.S. in the week ended July 20 rose by 26 billion cubic feet, broadly in line with market expectations.
Inventories rose by 48 billion cubic feet in the same week a year earlier, while the five-year average change for the week is an increase of 61 billion cubic feet, according to U.S. Energy Department data.
Total U.S. natural gas storage stood at 3.189 trillion cubic feet as of last week. Stocks were 487 billion cubic feet higher than last year at this time and 435 billion cubic feet above the five-year average of 2.754 trillion cubic feet for this time of year.
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.
The report showed that in the East Region, stocks were 167 billion cubic feet above the five-year average, following a net injection of 20 billion cubic feet.
Stocks in the Producing Region were 181 billion cubic feet above the five-year average of 938 billion cubic feet, after a net withdrawal of 1 billion cubic feet.
Natural gas futures found further support from weather forecasts showing hotter-than-normal temperatures across most parts of the U.S. in the next two weeks.
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.
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.
However, 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 210 billion cubic feet in the 16 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.
Barclays kept its fourth quarter natural gas price outlook at USD3.00. The bank raised its full year price average to USD2.64, up almost 8% from a previous estimate of USD2.43.
Elsewhere on the NYMEX, light sweet crude oil futures for delivery in September rose 0.59% to trade at USD89.90 a barrel,
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