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A Tale of A Split Week; NatGas Cash, Futures Finish Well In The Black

Traders might need treatment for whiplash following a week that saw natural gas cash and futures markets march mostly higher the first three days of the week on a widespread heatwave, only to retreat mightily on Thursday and Friday on mixed forecasts that the heat might dissipate.

NGI's National Spot Gas Average for the week ending June 12 still managed to post a hefty gain, as it added 30 cents from the previous week to $2.57.

July natural gas futures were in a similar predicament during the week, and on Friday traded within a narrow range before closing the day's regular session at $2.750, down 7.5 cents from Thursday's finish, but 16 cents higher than the previous Friday's close at $2.590.

Back in the physical market, all of NGI's regional averages saw gains of 20 cents or more, with the largest gains coming from areas most affected by the heatwave. The Northeast Region added 50 cents to average $2.09, and California jumped 28 cents to average $2.87.

The Rocky Mountains added 27 cents to average $2.56, and the rest of the country added 20 to 23 cents.

One non-factor on the fundamentals side was the Thursday morning storage report, which for the first time in a couple of weeks actually came in close to most industry expectations. The Energy Information Administration reported that 111 Bcf was injected into underground stores for the week ending June 5.

Breaking down the implications of Thursday's storage report, analysts at Tudor, Pickering, Holt & Co. (TPH) said the build was "a touch better" than the 113 Bcf expectations, and "much better" than the prior week's 132 Bcf on "essentially the same weather, which highlights how volatile shoulder season power-gen demand can be."

TPH said 111 Bcf is still a record injection for the week but on a weather adjusted basis indicates a reasonable 2 Bcf/d implied oversupply. "Current week's weather and eight- to 14-day forecast are both looking warmer than normal so expecting a nice near-term power-gen demand uptick and sub-100 Bcf injections over the next couple of weeks," TPH said, adding that the market is heading into summer with storage levels 2%, or 44 Bcf above normal.

Citi Futures' Tim Evans said it appears that the natural gas futures market is consolidating in negative territory on end-of-the-week book squaring, with a modestly cooler temperature outlook than a day ago subtracting some air-conditioning demand from the fundamental equation. "We continue to view the 111 Bcf net injection into DOE natural gas storage for the week ended June 5 as having been constructive, confirming an improvement on the prior week's 132 Bcf refill," Evans said. It was still more than the 89 Bcf five-year average however, so still moderately bearish on a seasonally adjusted basis. 

Days after the Energy Information Administration announced that it was raising its 2015 natural gas price forecast for the first time in months, a move that surprised some observers (see Daily GPIJune 9), Fitch Ratings said it was revising its assumptions lower yet again. Due to "increasing efficiencies and price pressure related to the U.S. shale boom," Fitch's price assumptions for the long-term Henry Hub natural gas price were revised down to $3.75/Mcf. The move reflects "increasingly efficient U.S. shale production, and tepid demand relative to the boost in supply," the ratings agency said.

After a couple of weeks of storage report estimate misfires from natural gas analysts and traders, they finally got one right Thursday morning as news of a 111 Bcf injection into inventories was nearly spot on with the industry consensus ahead of the report.

With no real surprise for the first time in a number of Thursdays, natural gas futures traders yawned. The July contract, which was hovering around $2.880 just ahead of the 10:30 a.m. EDT report, stayed right in the same vicinity in the minutes that followed. Just 10 minutes following the report, the prompt-month contract was trading at $2.860, down 3.1 cents from Wednesday's regular session finish.

This week analysts at Ritterbusch and Associates calculated a 109 Bcf injection, and IAF Advisors expected a 114 Bcf build. A Reuters survey of 25 industry cognoscenti showed an average 112 Bcf with a range of 96 Bcf to 119 Bcf. Last year 109 Bcf was injected and the five-year average is for a 89 Bcf increase.

The actual 111 Bcf build was also a steep departure in size from the previous week's 132 Bcf injection.

While the build was basically on target with most estimates, some industry experts were looking at the larger storage picture for direction. Evans, who was on the record with a 115 Bcf build estimate, called the actual number "supportive," noting that it was a bit smaller than some were expecting. "The 111 Bcf in net injections was less than the median estimate and confirmed a drop from the prior 132 Bcf surge, a constructive development," he said. "This may also ease fears regarding the current background supply-demand balance to some degree."

As of Friday, June 5, stocks are 753 Bcf higher than last year at this time and 44 Bcf above the five-year average of 2,300 Bcf. For the week, the East Region injected 62 Bcf, while the Producing and West regions chipped in 36 Bcf and 13 Bcf, respectively.

NatGasWeather.com called Thursday's storage report a nonevent but said "moderate to locally strong demand for cooling" will "cut into future weekly builds and keep them under 100 Bcf going forward, likely starting next week after heat and humidity from this week are accounted for."

Commenting on Thursday's pullback in futures after a three-day rally streak, Santiago Diaz, a broker with FCStone Latin America LLC, said he believes traders saw the opportunity to realize some gains. "I don't know if we are done to the upside here," he told NGI. "Power generation demand for gas is expected to ramp up a little bit because some warmer weather is expected in high-consuming regions of the United States, so that is firmly in the bullish column. On the other side, we've got bearish fundamentals such as excess gas supply. Right now it is a matter of fast money coming in and out. Traders are taking advantage of various cues and moving quickly."

Natural gas market bulls were down and out Friday as trading in the cash market as well as in the futures arena continued Thursday's bearish activity, further eating into the gains made from the week's first three days of positive action.

Physical natural gas points for weekend and Monday declined across the board, with most regions seeing drops from a couple of pennies to a dime. However, the Northeast and California showed the biggest drops heading into the weekend, with double-digit declines abound, despite mixed weather forecasts on whether the current heatwave will abate next week.

In California, gas traded Friday for weekend and Monday delivery plunged lower, ignoring a stubborn heatwave and perhaps correcting a round of over-bullishness earlier in the week. PG&E Citygate sank 12 cents to average $3.09. while SoCal Border came off 13 cents to $2.70.

While California took a hard fall, some northeastern points virtually fell off a cliff on Friday, as forecasters predicted the region's heatwave would break, giving way to more seasonal temperatures. Algonquin Citygate plunged below $2 Friday to average $1.55, down 67 cents from Thursday's trade. Dominion North and South came off 17 cents and 24 cents, respectively, to average $1.42 and $1.43.

Even northeastern points tied to the mighty Marcellus Shale, which have a history of marching to the beat of their own price direction drum, fell in line to finish out the week. Transco-Leidy Line declined 24 cents to average $1.41, and Tennessee Zone 4 Marcellus dropped 16 cents to average 71 cents, which is approaching unchartered territory.

The lowest average price Tennessee Zone 4 Marcellus has on record was 36 cents on Sept. 17, 2013.

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