The physical market was hit with a one-two punch Monday as a combination of restrictions at Northeast points along with an aggressive cooling trend in the Midwest pushed prices higher by double digits at many locations.
All market points posted gains, and the overall increase for gas traded Monday for Tuesday was a healthy 13 cents to $2.78. The Midwest and Midcontinent posted the greatest gains, but the Rockies and California were right behind. Natural gas futures wobbled within a 7-cent range, but at the close June was lower by 0.6 cent to $3.010 and July had fallen 0.9 cent to $3.061. June crude oil shed 26 cents to $59.43/bbl.
Traders like to see a market make continued advances to verify that a trend (in this case higher) is in place. With Monday's lackluster finish, futures traders are on the lookout for indications the market can't hold $3. "If we get a settlement below $2.98, that would likely signal the end of the advance near term," said a New York floor trader. "It looks like $3 is to natural gas what $60 is proving to be for crude oil."
Teri Viswanath, director of natural gas strategy at BNP Paribas, sees the market as "reasonably well supported...Seasonally, the near-absence of weather-related demand enables the industry to stockpile the largest quantities of supply during May. As nationwide temperatures begin to rise in June, cooling demand tempers the industry's restocking effort, with weekly stock builds steadily declining to the lowest seasonal levels in July and August. This year, however, the early onset of summer-like weather has resulted in the sort of daily highs that typically emerge in June.
"To be sure, while last week's stock release well exceeded last year's injection, the decline in daily storage receipts suggests that cooling demand has tightened supply-demand balances. The problem is, with milder weather ahead and prices moving above $3, electric power demand will likely falter. Nevertheless, with restocking currently falling behind last year's pace and the prospect of short-term heat ahead, the market appears to be consolidating around $3 pending better guidance on the weather ahead in June."
Prices have risen to the point where risk managers are closely watching producer sell hedges. "Natural gas settled higher again this week. Temperatures have been warmer than normal on the East Coast, and this is supposed to continue for another week. Summer forecast have also called for above-normal temperatures this summer, which have also supported prices," said Mike DeVooght, president of DEVO Capital Corp. in a weekly note to clients.
"The lower than expected inventory build this week was supportive for natural gas, but there still was a large build of 111 Bcf. The market brushed off any bearish news and continued to draw support from the funds short-covering to correct what had been a significant oversold condition.
"On a trade basis, we are getting closer to levels ($3.00-3.20-front month and the deferred above $3.50) that producers with a significant amount of natural gas production should consider hedging a portion of their production. On a speculative basis, stand aside."
Next-day prices in the Midwest posted healthy double-digit gains as temperatures were forecast to plummet from pleasant spring-like conditions to those more consistent with March or April. Forecaster Wunderground.com predicted that the high Monday in Chicago of 77 would drop to 53 by Tuesday and 51 on Wednesday. The normal high in Chicago is 71 this time of year. Detroit's high read on Monday of 86 was forecast to fall to 62 Tuesday and 61 Wednesday. The normal high in the Motor City is 71.
Gas on Alliance and the Chicago Citygate added 12 cents to $3.05, and deliveries to Consumers were seen 4 cents higher at $3.14. Gas on Michcon gained 3 cents to $3.13, and at Demarcation gas changed hands at $2.98, up 13 cents.
Gulf prices were also firm. Deliveries on Columbia Gulf Mainline added 6 cents to $2.97, and gas at the Henry Hub rose a nickel to $3.01. On Tennessee 500 L, gas was quoted 4 cents higher at $3.00, and gas at Katy came in 3 cents higher at $2.95.
The National Weather Service (NWS) is looking for cool, wet conditions with temperatures below normal. "Precipitation, including some wet snowflakes, will continue to diminish across the Dakotas and northern Minnesota on Monday as a strong low-pressure system continues to track across northern Minnesota before reaching southwestern Ontario later in the day," NWS said in a morning report.
"In the wake of this system, dry and colder conditions will develop across much of the northern Great Plains and upper Midwest on Monday as cold high pressure drops south from Canada. Forecast highs are expected to be several degrees below normal across much of the region. Behind a well-defined cold front, this colder air is forecast to spread further to the south and east, with temperatures staying below their normal highs across much of the central U.S. and Midwest on Tuesday."
Northeast delivery points soared as a major pipeline in the area, Algonquin Gas Transmission (AGT), announced numerous restrictions. It said it had "scheduled and sealed" nominations sourced from points west of its Stony Point Compressor Station as well as its Oxford Compressor Station to points east of Stony Point and downstream of Oxford.
In addition it said, AGT "has restricted 100% interruptible and approximately 33% secondary out of path nominations that exceed entitlements sourced from points west of its Southeast Compressor Station (Southeast) for delivery to points east of Southeast."
Likewise it said, "AGT has restricted 100% interruptible and approximately 61% secondary out of path nominations that exceed entitlements sourced from points west of its Cromwell Compressor Station for delivery to points east of Cromwell. No increases in nominations...except for Primary Firm No-Notice nominations, will be accepted."
Gas at the Algonquin Citygate jumped 44 cents to $2.06, and gas at Iroquois Waddington gained 33 cents to $2.99. Gas on Tennessee Zone 6 200 L rose 48 cents to $2.24.
Gas bound for New York City gained 48 cents to $3.10, and parcels on Tetco M-3 rose 22 cents to $1.72.