On the New York Mercantile Exchange, natural gas futures for delivery in October traded at USD2.707 per million British thermal units during U.S. morning trade, tumbling 1.1%.
It earlier fell by as much as 1.9% to trade at a session low of USD2.682 per million British thermal units, the lowest level since June 22.
Natural gas futures turned sharply lower after the U.S. National Hurricane Center downgraded Tropical Storm Isaac to a Category 1 hurricane as it crosses the Gulf of Mexico instead of a Category 2.
National Hurricane Center director Rick Knabb said earlier in the day that Isaac won't be as strong as initially thought when it hits land somewhere along the north Gulf Coast.
Prices rose by as much as 1% earlier to hit a session high of USD2.792 per million British thermal units after forecasters predicted late Sunday Tropical Storm Isaac will strengthen to a Category 2 hurricane with 48 hours, as it swept over the Florida Keys towards the oil-rich Gulf of Mexico.
Production in federal waters in the Gulf of Mexico account for about 7% of natural gas output and prices typically spike when storms threaten production. The U.S. Atlantic hurricane season began on June 1 and ends November 30.
Concerns over bloated U.S. inventory levels have also dampened the appeal of the commodity.
Total U.S. gas supplies stood at 3.308 trillion cubic feet last week, 14.7% above last year’s level and 12.1% above the five-year average level for the week.
Inventory didn't top the 3.3-trillion cubic feet level in 2011 until the end of September, with stocks peaking at a record 3.852 trillion cubic feet in November of last year.
Market analysts have warned that without strong demand through the rest of the summer cooling season, 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 150 billion cubic feet in the 14 weeks left before winter withdrawals begin to avoid breaching the government's 4.1 trillion cubic feet estimate of total capacity.
Early injection estimates for this week’s storage data range from 49 billion cubic feet to 62 billion cubic feet, compared to last year's build of 60 billion cubic feet. The five-year average change for the week is an increase of 62 billion cubic feet.
A bout of extreme heat across much of the U.S. over the past two months helped boost natural gas prices above the key USD3.00-level in recent weeks. Prices rallied to a 2012 high of USD3.275 per million British thermal units on July 31.
But futures have come under heavy selling pressure since the start of August, losing almost 15% after extended weather forecasts pointed to milder weather across most parts of the U.S. throughout most of the month.
From a technical standpoint, prices were expected to find strong near-term support close to the 200-day moving average of USD2.682.
200-day moving averages are considered key trading levels for many investors, often serving as a floor for prices after big declines.
Elsewhere on the NYMEX, light sweet crude oil futures for delivery in October fell 1.2% to trade at USD95.00 a barrel, while heating oil for October delivery added 0.35% to trade at USD3.129 per gallon.
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