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Natural Gas Pops to 5-Month High

The heat is on and it's lit a fire under natural gas prices.

STR | AFP | Getty Images

Natural gas futures settled at a 5-month high on Tuesday. Prices continued to rally in electronic trading to levels not seen since January.

July natural gas futures closed at $2.767 per millionBTUs, the highest settlement price since January 11, 2012. Natural gas has been surging on forecasts for warmer-than-normal temperatures across the U.S.

“As the heat hits the Midwest and Northeast, temps will go back up to the 90s-100s later this week and next,” says broker and analyst Eugene McGillian of Tradition Energy.

The increase in cooling demand is driving natural gas prices higher.

"Last week and this week, temperatures have been about 20 degrees higher than expected for most of the country and that's squeezed some of those who had short positions in natural gas out of the market," says trader and broker John Woods, president of JJ Woods and Associates.

Some technical trading may have also come into play, traders say. As July natural gas options expired at the end of floor trading at the NYMEX on Tuesday, the natural gas market gravitated toward the $2.75 strike price — and then continued to rally beyond that mark. July natural gas futures expire Wednesday. August natural gas futures, which settled at $2.807 on Tuesday, will become the front-month.

Technically, natural gas may be poised for another move higher, but could face some roadblocks. "The 200-day average for natural gas is around $2.85, which will be a huge resistance level," Woods says.

Meanwhile, production shut-ins in the Gulf of Mexico — that may have spurred some of the climb in natural gas prices over the past few days — have dropped dramatically as Tropical Storm Debby has weakened and moved toward Florida. About half of the production that was shut Monday afternoon has come back online. According to the Bureau of Safety and Environmental Enforcement, about 17 percent of the current daily natural gas production in the region has been shut-in.

- ByCNBC's Sharon Epperson
Follow Sharon on Twitter: @sharon_epperson

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    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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