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Short relief: The nat gas rally may not be over

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Just as everyone was breathing a sigh of relief over the retreat in natural gas prices at the end of a frigid winter, it may be time to start worrying again.

The onset of summer means utilities are going to need more of the fuel to meet demand for what some forecasters predict will be a sweltering summer.

Domestic Henry Hub natural gas prices are far cheaper than the cost of nat gas abroad, where prices are more than double U.S. prices. Yet that comes as little comfort for consumers, who saw retail utilities prices soar from December to February—in large part because of spiking nat gas demand.

The unprecedented cold "is leaving a big mark on the U.S. nat gas market," Bank of America-Merrill Lynch said in a research note this week, adding that the only way to alleviate tight demand "is to force…rationing through higher prices." It suggests power users could be in for yet another sticker shock just as they finished paying off winter utility bills.

Although prices set a three-week low near $4.50 last week, analysts suspect the lull is unlikely to last. Freezing temperatures have left nat gas stockpiles depleted, and they won't be fully replenished before summer, which scientists warn may be the hottest on record.

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"There's a heat wave out of Texas and Oklahoma that is really gathering momentum," said Richard Hastings, macro strategist at Global Hunter Securities. "If that takes place…and you have enough electric power consumption for nat gas, it makes it really difficult to rebuild nat gas storage."

Last week, U.S. nat gas supplies rose by 74 billion cubic feet, according to the Energy Information Administration's latest data. Supplies have been climbing steadily since April 4.

Yet inventories have only recently begun to rise after a tundra-like winter forced utilities to pull a record 3 trillion cubic feet from storage for heat and electricity generation. Nat gas prices subsequently skyrocketed above $6. Power companies are gradually using more natural gas to replace coal.

Higher prices are forcing utilities to engage in what BofA-Merrill Lynch called "demand rationing" that could cause utilities to switch back to cheaper coal ahead of the winter. Partly for that reason, the EIA expects coal demand to rise 4.4 percent this year.

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Regardless of the expected rise in nat gas prices, few analysts expect the fuel to revisit levels above $6 anytime soon, if only because summer nat gas demand will be used primarily for electricity rather than heat. BofA-Merrill Lynch is forecasting prices to remain under $5 this year.

However, that modest relief may not last — and in fact could be too optimistic.

Global Hunter's Hastings pointed to "a heat wave during summer leading to insufficient rebuilding during September," which is when producers start stocking away gas for winter.

That could create a scenario "where the price floor drifts up to $5, then the next jump from there is a rally up to high $5 range, and conceivably back up to $6," he said.

—By CNBC's Javier E. David.

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