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NatGas Physical, Futures Continue to Erode, Yet Technicians See an Opportunity; January Loses 13 Cents

Physical natural gas prices for Wednesday delivery could get no help whatsoever from weather forecasts, the screen or power markets. Both futures and physical prices got hit with a double-digit flogging in Tuesday's trading.

All but a few scattered points were deep in red ink, and hardest hit were New England points with losses over $1. The Mid-Atlantic and Midwest were pummeled with losses of about 20 cents, but Appalachia and the Marcellus suffered only minor losses. Overall, the market fell 17 cents to average $3.59. Futures prices continued to slip-slide away, unable to hold anything close to $4 support. At the close, January had lost 13.3 cents to $3.874 and February was down by 13.2 cents to $3.877. January crude oil continued its losing ways, dropping $2.12 to $66.88.

Falling New England power prices as well as sliding peak power requirements provided no incentive for power buyers to step to the plate for any incremental volumes. ISO New England forecast that peak power load for Tuesday of 18,500 MW would fall to 17,510 MW Wednesday and 17,630 MW Thursday. IntercontinentalExchange reported that peak power Wednesday at ISO New England's Massachusetts Hub tumbled $8.65 to $38.55/MWh. Peak power in eastern New York (Zone G) for Wednesday fell $4.00 to $43.00/MWh.

Quotes at the Algonquin Citygates plunged $1.07 to $3.72, and deliveries to Iroquois Waddington were seen 30 cents lower at $4.11. Gas on Tennessee Zone 6 200 L dropped 98 cents to $3.81.

A softening weather outlook put market bulls on the defensive as well. The National Weather Service in southeast Massachusetts said "a warm front arrives tonight...resulting in a wintry mix of  precipitation into early Wednesday morning...then changing to all rain. Much milder weather briefly returns Wednesday afternoon. Thursday begins a trend towards colder but dry conditions. Low pressure may bring a period of rain sometime this weekend with a possible wintry mix across the interior."

Wunderground.com predicted that the high in Boston Tuesday of 39 would rise to a balmy 55 Wednesday before returning to 42 on Thursday.

Next-day gas in the Mid-Atlantic also fell on the heels of moderating power demand and prices. PJM Interconnection forecast that Tuesday's peak load of 40,163 MW would drop to 35,076 MW Wednesday before inching up to 36,656 MW Thursday. IntercontinentalExchange reported Wednesday peak power at the PJM West terminal fell $7.43 to $37.38/MWh.

Next-day gas headed for New York City on Transco Zone 6 shed 22 cents to $3.54, and deliveries to Tetco M-3 slid 20 cents to $2.96.

In the Marcellus and Appalachia, quotes held up reasonably well. Gas for delivery Wednesday on Transco Leidy rose 1 cent to $2.21, and packages on Dominion South eased a 7 cents to $2.68. Next-day gas on Millennium changed hands 10 cents lower at $2.55, and gas on Tennessee Zone 4 Marcellus drifted lower by 6 cents to $1.98.

Farther west, gas prices tumbled further in spite of weather forecasts calling for below-normal temperatures. Gas at the Chicago Citygates dropped 21 cents to $3.95, and deliveries on Alliance were seen off 17 cents to $3.97. On Consumers, Wednesday gas was seen at $4.03, down 18 cents, and on Michcon next-day parcels changed hands at $4.03, down 18 cents. At Demarcation, Wednesday gas was quoted 19 cents lower at $3.95.

Wunderground.com forecast that Pittsburgh's Tuesday high of 41 would rise to 43 Wednesday before retreating to 39 Thursday. The seasonal high in Pittsburgh is 43. Chicago's frigid high Tuesday of 34 was expected to inch up to 35 Wednesday and Thursday, five degrees below the seasonal norm.

Producing regions were also hard hit. On ANR SW, next-day gas was seen at $3.69, down 16 cents, and at the NGPL Midcontinent Pool packages came in 15 cents lower at $3.66. On NGPL TX OK, gas fell 11 cents to $3.62, and on OGT Wednesday deliveries traded 7 cents lower at $3.69. Gas on Panhandle Eastern shed 13 cents to $3.70.

A weak weather outlook combined with a compromised technical picture sets the market up for another 20-cent decline. "Consensus of forecasts suggests above -- much above temperature patterns across almost the entire U.S. with extension out to about the middle of this month," said Jim Ritterbusch of Ritterbusch and Associates.

"This virtually assures a three-week string of smaller than normal supply draws that will be kicked off on Thursday with a figure that could fall short of last year's 141 Bcf decline by triple digits. A number smaller than the five-year average of about 50 Bcf would also appear tabled based on last week's warmer than normal temperature trends that likely combined with a rebound in production following some temporary well freeze-offs and pipeline issues.

"A violation of our expected support at $4.05 shifts the technical picture considerably, and a further slide to around the $3.70-3.75 zone is certainly possible by week's end if the mild temperature forecasts stretch into the third week of December. Our very short-term bias is to the downside in view of the updated temperature views. But we would continue to caution against entry at current levels given the extreme two-sided volatility that has developed during the past month as a result of rapidly changing temperature patterns."

The tectonic shifts in the weather outlooks have analysts retooling their supply estimates. "The milder weather outlook that has recently unfolded suggests that the industry will likely restore a year-on-year storage surplus by month-end, with last week's first triple-digit stock draw of the season looking increasingly like an outlier," said Teri Viswanath, director of natural gas trading strategy at BNP Paribas.

"We suspect that analyst predictions for this week's storage release, released later today, will range from a 28 to 32 Bcf withdrawal. The next two reports, for this week and next, should likewise rival the five-year reference lows or draws between 35 to 50 Bcf.   Accordingly, the prospect of more than 3 Tcf of working gas in storage by year-end has reset the range of natural gas prices.  What's more, should the winter carry-out levels exceed 1.7 Tcf, the industry could confront physical challenges in managing the  excess supply next summer."

Undaunted, technical analysts see a buying opportunity in the cards. "Last year from 12 December to 21 January, natgas congested between $4.532 and $3.953. On 22 January, natgas broke out of this consolidation range," said Brian LaRose of United ICAP. "The rally ended on 24 February at $6.493. So far, this year's price action is playing out in a very similar fashion. So, are the fireworks about to begin? If so, this year's seasonal target is $7.330. We reiterate our scale down buy recommendation," he said in closing comments Monday to clients.

Overnight weather models suggest forecast warmth might be somewhat overdone. "While a warm-prevailing pattern persists for the first half of December, the dynamic models did pull back on the warmth intensity somewhat over the past 24 hours, justifying a slight increase in overall national demand for today's forecast," said Matt Rogers, president of Commodity Weather Group, in the firm's Tuesday morning forecast.

"The Midwest, East and South see slight colder changes today while the West is same to slightly warmer overall," he said. "The European model guidance has been cooling the most in the past day or two with the European operational even favoring near-30-year normal anomalies for most of the Midwest, East and South (cooler Texas) next week. Indeed, there is mounting concern that the models may be misreading tropical forcing influences that could continue these cooler trends for next week into the middle of the month as the main warm ridging may shift more north and west than the models are currently anticipating. This still does not open bigger cold air supply, but it limits the warmth potential, too."

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