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Physical Gas, Futures Dance Higher; November Expires Up 8 Cents

Physical gas for Thursday delivery surged in Wednesday’s trading as forecasts called for plunging temperatures and a strong hint that the mild conditions experienced until recently might have to give way to a more seasonal temperature regime.

Northeast points led the charge higher with locations posting gains of $1 or more, and stout double-digit gains prevailed throughout the Mid-Atlantic and Marcellus Shale region. Producing regions also participated in the advance, and the only points in the red were those associated with New York City. Overall, the market gained 21 cents. The expiring November contract may have taken a page out of the cash playbook and rose 7.9 cents to $3.728 with December adding 5.7 cents to $3.788. December crude oil gained 78 cents to $82.20/bbl.

A cold front slicing across the East was enough to prompt next-day highs as much as 18 degrees lower Thursday. The National Weather Service in suburban Philadelphia said, "a cold front across the coastal waters will continue to move east tonight. High pressure across the Ohio Valley will build across the area Thursday before weakening early Friday. Low pressure will move southeast out of the Great Lakes Friday. This low will combine with low pressure off the middle Atlantic coast Saturday while strengthening. This deep low will then track northeast away from the area Sunday. High pressure will build in for Sunday night and into early next week."

Forecaster Wunderground.com predicted that the Wednesday high in Boston of 75 would drop to 57 Thursday and fall further to 52 Friday. The normal high in Boston is 57. New York City's 71 high on Wednesday was expected to fall to 59 Thursday before easing to 58 on Friday. The seasonal high in New York City is 60. Philadelphia's 69 high Wednesday was expected to drop to 60 Thursday before falling to 59 Friday. The normal late-October high in Philadelphia is 59.

Next-day gas in New England took the biggest jump. Deliveries to the Algonquin Citygates vaulted $1.41 to $4.03 while parcels at Iroquois Waddington added 35 cents to $3.98. Gas on Tennessee Zone 6 200 L shot higher by $1.49 to $4.14.

Across Appalachia and the Marcellus, prices also posted robust gains. Gas on Millennium added 32 cents to $2.34, and on Dominion South, next-day gas changed hands at $2.45, up 38 cents. On Transco Leidy, deliveries came in at $2.41, up 37 cents, and parcels on Tennessee Zone 4 Marcellus were quoted at $2.15, up 25 cents.

In the Mid-Atlantic, next-day prices went both ways, with gas on Tetco M-3 jumping 53 cents to $2.62 but gas at New York City points falling by about an equal amount on lower power requirements.

The New York Independent System Operator reported that peak load Wednesday into New York City of 6,600 MW was expected to drop to 6,262 MW Thursday and 6,163 MW Friday.

Gas on Transco Zone 6 New York was seen 55 cents lower at $2.66, and non-New York locations south of Station 195 changed hands at $2.67, down 37 cents.

Producing regions also participated in the day's advance. Gas at the Cheyenne Hub added 14 cents to $3.56, and deliveries to CIG Mainline were up by 13 cents to $3.50. Gas at Opal added 12 cents to $3.56, and deliveries on Northwest Pipeline WY rose by 13 cents to $3.50. Packages on Transwestern San Juan came in 12 cents higher at $3.56.

Traders and marketers are beginning to focus more intently on longer-term weather forecasts calling for a cold-but-not-as-cold winter to last year. "We had an AccuWeather forecast that said it was going to be a cold winter," said a Houston-based pipeline veteran. "He looked at similar years and compared El Nino-related factors, where we are in the process, and things are different than they were last year.

"The heating of the water is different, and at a different location than last year, and he thinks that will have a major effect on things and keep things warmer than last year. Not nearly the severity we had last year."

Traders will have a look Thursday at a "severe" storage report, at least in comparison to historical averages. Last year, 45 Bcf was injected, and the five-year average stands at 59 Bcf. For the week ended Oct. 24, analysts at IAF Advisors calculate a 87 Bcf injection, and Ritterbusch and Associates is looking for a 91 Bcf build. A Reuters survey of 23 industry traders and analysts revealed an 85 Bcf increase with a range of 77-93 Bcf.

Tuesday's gains didn't seem to have much long-term significance, according to industry analysts. "While the rebound from lower levels may have been supported by a modestly less bearish temperature outlook, the overall swing looks like it was driven by short-covering ahead of the contract expiration or short-term technical support after prices snapped back to the upside after managing only a minor new low," said Tim Evans of Citi Futures Perspective.

"The market may also be focusing more attention on Thursday's DOE storage report for the week ended Oct. 24. We've only seen a handful of other estimates so far, but it looks as though the early consensus is for a build of 85-86 Bcf, a small step down from the 95 Bcf rate of the prior two weeks. Although the week-to-week decline highlights the emerging seasonal trend toward increased heating demand, refills would still be well above the 58 Bcf five-year average for the date."

Heating requirements aren't quite there yet. The National Weather Service for the week ended Nov.1 calculates below-normal heating requirements for key population centers. New England is expected to endure 107 heating degree days (HDD), or 26 below normal, and the Mid-Atlantic is set to see 94 HDD, or 24 below normal. The greater Midwest from Ohio to Wisconsin should experience 98 HDD, or 31 fewer than its seasonal accumulation.

"Our own forecast is only slightly less bearish, with a projected 83 Bcf build for last week and above-average injections also expected to continue," Evans said. "Even with the less-bearish midday weather update, the net change from a day ago still looks bearish."

By Nov. 14 Evans figures that injections will still be rolling along at a 46 Bcf pace with the year-on-five-year deficit down to 187 Bcf. "In contrast with this bearish storage trend, Tuesday's upturn in price suggests the market may have become at least temporarily undervalued, with prices trading at a discount to a year ago even with inventories that are still tighter year on year. It will take more of a recovery to establish that a lasting floor is in place, but with heating demand set to rise in the months ahead, we do see it as a possibility."

Evans recommends holding on to a long December futures position opened Oct. 16 at $3.83 with a protective stop at $3.58. If prices should rally above $3.85, he would raise the protective stop to $3.63.

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