I think the (natural) gas storage surplus is smoke-and-mirrors, said Phil Flynn, Energy Analyst for Alaron Trading Corporation in Chicago. It masks an underlying problem with production. Mr. Flynn is not alone in his assessment of the natural gas market. Jim Cramer of The Street.com echoed similar thoughts. Flynn wrote in his Energy Report on Tuesday, Lets face it the heat has melted away the veil of secrecy around the natural gas complex. The devastating U.S. heat wave has left its mark on North Americas electricity grids, which has now reversed the downward trending price of natural gas.

The year-to-date bottom for September natural gas futures prices came on July 18th. A reversal came the following day and pricing has since climbed higher on (a) Californias heat wave, (b) natural gas inventory drawdowns and (c) near-record high or record-high electricity usage in the eastern half of the United States and parts of Canada. Also on July 18th, we published our interview with Sprott Asset Management analyst Eric Nuttall, entitled, Zero Doubt: Natural Gas Prices Will Go Higher Again. The markets are all about timing and the interview with a member of the Sprott Asset Management team again reminds us why they are amongst the most prescient (and successful) of North Americas money managers.

Natural gas production is declining. The demand for natural gas continues to rise and production is failing to keep pace, Flynn told us. The storage surplus has given us a false sense of security. On July 10th, James Rogers told us, Longer term, natural gas production is declining in North America. Eric Nuttall told us, North American natural gas production has been in decline for several years.

Natural gas is the primary source for electricity generation. Record humidity and temperatures drive consumers to run their air conditioners on higher settings and for longer periods. In one Reuters news agency report, Ohio dairy farmers were reportedly air-conditioning their cows to keep them alive. Another heat wave passing through the United States might seriously jeopardize the countrys power grid.

The New York Times reported this past Wednesday, Experts say demand is rising faster than the ability to meet it, which over the long run could pose the risk of both local and regional failures. Three system operators, managing regional grids for the some of the worst-hit states, said demand for electricity set new records which eclipsed records set only two weeks earlier.

The Cape Verde Hurricane Season

Experts have begun calling this the Cape Verde Hurricane Season, because multiple storm systems are moving westward from Africa through the Cape Verde Islands. Hurricane scientists from Europe and the United States are now in Africa studying the clusters of storms rolling off Africas coast. Another team is in the Caribbean. Some of the thunderstorm clusters, called tropical waves, which form between seven and ten times per month, develop into hurricanes. Of the 60 or 70 tropical waves passing over West Africas Cape Verde Islands, about ten percent grow into tropical storms or hurricanes. According to the National Oceanic and Atmospheric Administration (NOAA) in Miami, these African thunderstorms account for 85 percent of all major Atlantic hurricanes.

Offshore oil and gas production in the Gulf of Mexico, which accounts for about 25 percent of U.S. production, may be shut down again this summer. There could be several hurricanes expected in the Gulf of Mexicos hurricane season, which lasts through November 1st. Most of the devastating Atlantic hurricanes occur between mid August and early October because of the warmer water temperatures.

Things are not back to normal in the Gulf of Mexico, said Flynn. Gas storage is needed as a buffer against extreme weather. In this case, a hurricane or a series of hurricanes would be extreme weather. Flynn believes that despite ample storage the market is easily given into the passions of weather extremes.

In our mid July interview with Sprotts Eric Nuttall, he leaned toward the camp which was bullish, saying, Now is the time to load up on the (nat gas and CBM) stocks. He recommended some of his firms favorites, which as he admitted at the time could trade sideways for the next two months. These included, among others, Crew Energy (TSX: CR), Canadian Spirit Resources (TSX: SPI) and Pacific Asia China Energy (TSX: PCE).

Nuttall believed there were significant opportunities in unconventional gas companies, known as coalbed methane (CBM) companies, as well as conventional gas shares. As Nuttall previously told us, Most incremental production is coming from smaller, more expensive-to-drill, thinner economic, higher decline pools and reservoirs.

But, Nuttall cautioned, Timing on any natural gas investment right now is tricky. And he added, Although the market might be a bit sloppy for a few months, I think there are some great bargains to be had for the patient investor.

We pursued our July interviews on the subject of natural gas based upon a luncheon meeting we had in early June with Steven Mizener, chief equities strategist for the Toronto mutual fund company, Sentry Select. He advised patience in the natural gas markets and that by the end of August, natural gas stocks might again gain favor. Phil Flynn warned of stronger drawdowns this winter, With a colder winter and heating usage for gas, there will be a lot more drawing (of the inventories). We could have a significant depletion in storage if we have a cold winter. Again, investors have been lulled by the false sense of security of the perceived storage surplus. And as one wit remarked on the Motley Fool chat board, With that inventory drawdown last week due to the heat, it appears that we may have seen the bottom in natural gas for some time to come.