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Most NatGas Basis Markets Enter Shoulder Season Doldrums

Natural gas forward basis markets continued to hibernate during the first week of April, with only a few market hubs shifting five cents or more despite some rather significant movement in Nymex futures.

The Nymex May gas futures contract plunged 12.2 cents between Monday April 6, and Thursday April 9, largely on word from the U.S. Energy Information Administration that storage inventories grew by a larger-than-expected 15 Bcf for the week ending April 3.

Forwards markets turned a blind eye to the bearish storage data as generally mild weather persists over much of the country.

There were some exceptions, however. At New England’s Algonquin Gas Transmission Citygate, May basis jumped 7.6 cents between Monday and Thursday, to reach minus 20.3 cents/MMBtu, according to NGI’s Forward Look. The strength comes as cash prices experienced some volatility driven by a cold blast that temporarily boosted regional demand.

Algonquin June basis, meanwhile, fell 1.7 cents to plus 3.1 cents/MMBtu, as did the balance of summer (June-October), which was flat. Further out the curve, winter strips continued to come down from recent highs, shedding some 18 cents and 21 cents, respectively.

Elsewhere in the Northeast, prices at both Transco Zone 6-New York and TETCO M3 failed to budge at the front of the curve and saw only modest shifts of no more than a few cents through the summer.

With outright prices for the balance of summer ranging from $1.55/MMBtu (Dominion South Point), to as high as $2.66/MMBtu (Algonquin citygates) across the Northeast, some analysts expect power demand in the region to be strong this summer as more generators are incentivized to switch from coal to gas to meet their power needs.

In addition, a slew of older coal plants are scheduled to retire this summer, adding another element to the possibility of higher gas demand.

One analytics firm, Bentek Energy, is projecting gas demand to top 2012’s record year.

But since many of those coal plants have operated with low utilization rates of roughly 25%, analytics firm Genscape expects coal retirements to generate less than 900,000 Mcf/d of incremental gas burn this summer.

Prices, however, may be what catapults power demand in the Northeast this summer.

“I do think people are generally overestimating the impact of coal retirements, but I wouldn’t be surprised to see record gas for power demand this summer, especially in the Northeast,” said Cory Madden, Genscape’s natural gas research manager. “The summer strip at Algonquin Citygate barely traded at a premium, at $0.04/MMBtu basis. Even in 2012, when we had the next lowest price environment, basis for the remainder of the summer was at $0.33/MMBtu.”

A Northeast trader said it’s also important to consider whether coal plants generated more during the summer versus the winter is one consideration to make.

But he, too, said price will ultimately decide just how much gas is utilized for power needs this summer.

“The majority of forecasts are for a mild overall summer, so it’s going to be price that incentivizes power burn, and at $2.50/MMBtu, we should see it,” the trader said. “We think the coal retirements will have a marginally positive impact.”

Across the country in the West, prompt-month prices at a couple market hubs strengthened a bit as water concerns continue to weigh on the markets.

At Northwest Pipeline-Sumas, May basis climbed 5.8 cents between Monday and Thursday, to reach minus 47.3 cents/MMBtu. June was up 5.3 cents to minus 44 cents/MMBtu, while the balance of summer was up 3.3 cents to minus 41.1 cents/MMBtu.

In California, Pacific Gas & Electric citygates May basis bumped up 5 cents to plus 28 cents/MMBtu, while June rose 3.8 cents to plus 25.3 cents/MMBtu. The balance of summer climbed 3 cents to plus 27.7 cents/MMBtu.

The strength in these markets can be attributed to ongoing concerns about regional water supplies.

Observed runoff conditions through the Dalles Dam (Columbia River) are 139% of normal this year to date, while the Grand Coulee Dam in Northern WA is running 179% of Normal, according to the Northwest River Forecast Center, which held its monthly meeting April 9.

While this may appear to be positive news for water supply, the agency has indicated that exceptionally strong spring runoff is a sure sign of losing snowpack too early.

In a note to clients Friday, Genscape said the Center reported that northern Washington and Canada have actually built snowpack levels in previous days, despite temperature deviations of 3 to 6 degrees above normal. Stronger Canadian snowpack levels may offset weak snowpack in the states, especially for The Dalles Dam whose portfolio is made up of about 45% Canadian snowpack and precipitation runoff during the April-September period, the NRFC said.

Meanwhile, California snowpack levels are exhausted, with statewide snowpack levels sitting at 5% of normal. For beginning of April levels, this is the lowest the state has seen since at least 2011.

The National Weather Service Climate Prediction Center three-month precipitation outlook is calling for equal chances of above- and below-normal precipitation levels for the West, while temperatures are trending upwards towards a higher probability of above-normal temperatures. This leaves the April through September water supply forecast at 90% of normal for the Grand Coulee Dam and 82% of normal for The Dalles Dam.

Elsewhere in the country, typical spring weather is expected to continue dominating for at least the next 10 days or so.

“The weather data continues to struggle on the pattern after April 19-20th, with plenty of flip-flopping to come as the weather models show wildly varying ways colder air travels across Canada to impact the U.S.,” said forecasters with NatGasWeather.

Meanwhile, there will continue to be periods of light cooling demand over Texas and portions of the southern U.S. in the weeks ahead, where highs will reach the 80s to lower 90s, but the forecasters said it would need to be a bit hotter and also cover much greater territory to be considered significant.

“It should be noted, temperatures over the southern U.S., namely Texas, are now warm enough where slightly cooler-than-normal temperatures should be considered favorable for builds in supplies as it will keep conditions from becoming too hot,” NatGasWeather said. “On the heating demand side, without truly frigid Canadian air aggressively pushing into the northern U.S. over the next several weeks, supplies will have opportunity to make up ground on deficits in larger chunks as April progresses, which we consider to be fairly bearish for weather sentiment.”

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