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Eastern Strength Can't Offset Broader Declines; NatGas Futures Drift Higher

Physical natural gas for delivery Tuesday eased as moderate strength at northeast points on Monday failed to offset broader declines in the Gulf, Rockies, and California. Overall the market shed 2 cents to $2.33.

Pipeline restrictions in New England kept a bid under the market, but otherwise, a soft power pricing environment helped soften Marcellus and Mid-Atlantic quotes. Futures moved little in quiet trading and were held to a 7-cent range.

At the close, July finished at $2.649, up 0.7 cent, and August had gained 1.2 cents to $2.677. July crude oil fell 10 cents to $60.20/bbl.

"We've been in this territory before, and there is nothing extreme and no news," said a New York floor trader. "Prices could probably get down to the low $2.50s and work their way to $2.73 or even the low $2.80s. I think you will see sideways movement until something comes into the picture to affect things. It may be Thursday's report before we see a test of either end of the range,” referring to the Energy Information Administration’s weekly gas storage data. “There is nothing fundamental that warrants movement at this time."

For the week ended May 29, July futures lost nearly 28 cents, and risk managers were hoping that strength early in the week would provide a hedging opportunity.

"With [last] week's selloff, the gas market gave back most of the gains over the past month," said DEVO Capital Management President Mike DeVooght. "On a trade basis, we were looking for an opportunity to get short in the front [months] at $3.20 and the backs in the $3.50-3.60 range. We did get close, but unfortunately we did not reach our sell levels. At this time, we will stand aside and await future developments."

Those future developments may include an opportunity to re-enter those short hedges.

"Although last week's expiration and subsequent selloff reflected shoulder month weakness, Market Profile shows upside potential with two untested [value areas],” said Tom Saal, vice president at FC Stone Latin America LLC in Miami, in his work with Market Profile.

Saal identified two areas of interest on the weekly July Market Profile: last week's value area at $2.883-2.729 and a second value area at $3.082-2.986.

Those versed in Elliott Wave and retracement analysis take a somewhat different tack.

"On the ascent from the $2.443 low, the $3.102 level was a very important candidate for resistance as the ‘a’ = ‘c’ objective," said United ICAP’s Walter Zimmermann in a weekly report to clients. "I surmised that a peak there would be a candidate for the seasonal spring peak. Now the case for a larger advance is at risk. If natgas fails to ricochet higher by the $2.540 level then a drop to the $1.880 area becomes possible."

In the physical market, quotes at the Algonquin Citygates advanced, but traders see pipeline expansions leading to weaker prices as Marcellus gas makes its way to New England. Gas for delivery at the Algonquin Citygate added 6 cents, but ended the day at just $1.66.

Gas on Iroquois Waddington rose 16 cents to $2.55, and deliveries to Tennessee Zone 6 200 L added 48 cents to $2.18.

Gas delivery to the Marcellus wasn't far off that of the Algonquin Citygate. Deliveries on Millennium rose 2 cents to $1.25, and packages on Transco Leidy shed 8 cents to $1.13. Packages on Tennessee Zone 4 Marcellus fell 13 cents to 99 cents, and gas on Dominion South fell 3 pennies to $1.21.

"I think this is more of what you will see as soon as more of the Algonquin AIM [Algonquin Incremental Market] pipe gets built," said a New England marketer. "Come 2016 does it start looking like this from December through March?"

The Algonquin AIM project would be a significant development in the New England market. Last Thursday, Algonquin officially filed its Federal Energy Regulatory Commission notice of  construction commencement to signal that AIM is underway, Genscape Inc. consultants said in a report.

The project is to include new pipeline segments, compressor units and meter stations scattered throughout New York, Connecticut, Massachusetts and Rhode Island. Upon completion it could flow an additional 332 MMcf/d on the Algonquin system, potentially bringing increased stability to winter prices. Construction is slated for completion in November 2016, Genscape said.

"You can look at it as though it is very localized," the marketer said. "Chicago is not doing it, Dawn isn't doing it. Iroquois is doing it somewhat, but nowhere near what's happening on Algonquin. Iroquois is trading around $2.40, but that's nowhere near the $1.70 [Algonquin]. There is more molecules than there is demand.

"We'll see what happens to Chicago when it gets connected to the Utica Shale. With the amount of production growth you will probably start seeing all of these markets looking kind of flatish."

Next-day power prices in the East were soft. Intercontinental Exchange reported that Tuesday peak power at the ISO New England's Massachusetts Hub fell $2.40 to $23.91/MWh. Power  at the New York ISO's Zone A terminal (western New York) fell $9.00 to $22.75/MWh, and at the PJM West Hub, next-day on-peak power added 37 cents to $32.21/MWh.

Next-day gas at major market hubs were generally weak as well. Gas at the Henry Hub was quoted at $2.60, down 4 cents, and deliveries to the Chicago Citygate added a penny to $2.60. Gas at Opal fell 2 cents to $2.38, and next-day deliveries to PG&E Citygate changed hands 3 cents lower at $3.00.

Heating and cooling requirements for the week ended June 6 do not look like potential market drivers if National Weather Service (NWS) forecasts of heating and cooling requirements in major market centers are correct. NWS predicted a combined total of 45 degree days (DD), or 11 more normal for New England, but New York, New Jersey and Pennsylvania are expected to see just 27 DD, or eight below normal. The Greater Midwest, from Ohio to Wisconsin is forecast to experience 42 DD, or six below normal.

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