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Late Week Demand Shift Seen; Futures, Cash NatGas Drift Higher

Physical gas for Thursday delivery inched higher in Wednesday's trading, and while forecasts are calling for cooler Canadian air by the end of the week, shoulder season patterns on balance are benign and not likely to motivate significant buying or selling.

The NGI National Spot Gas Average added 2 cents to $2.31, and typically volatile eastern points on average could only muster a one-cent advance as well.  At the close, November had added 2.0 cents to $2.518, and December was higher by 1.1 cents to $2.732. November crude oil slipped 2 cents to $46.64/bbl.

Meanwhile, futures traders are anticipating another near-century-mark addition to natural gas inventories in Thursday's Energy Information Administration (EIA) storage report.

Next-day gas at Gulf points showed little movement from unchanged as weather forecasts nationally were either right at seasonal norms or showing unseasonal warmth. Forecaster Wunderground.com predicted Chicago's high Wednesday of 61 would climb to 66 Thursday before slipping to 54 on Friday, 10 degrees below normal. New York City's 68 high on Wednesday was forecast to ease to 65 on Thursday, climb back to 67 on Friday before dropping to 58 on Saturday. The normal high in New York City is 64.

Next-day gas on Columbia Mainline added a penny to $2.37, and gas at the Henry Hub was up a penny to average $2.44. Deliveries to Katy were seen at $2.42, flat, and gas on Florida Gas Zone 3 changed hands 2 cents higher at $2.44.

That late week cool down may be just what the doctor ordered to get boilers fired up, holders of short futures contracts motivated to cover, and otherwise change the complexion of the market from a lackluster trading affair to one anticipating higher demand and improved pricing.

Demand in the Southeast could take a sizeable jump, according to analysts.

"Weather forecasts predict a bout of cool weather will hit SEMA [Southeast Mid-Atlantic] starting on Friday and continuing through Sunday," reported industry consultant Genscape Inc. "SEMA demand typically picks up for winter in early to mid-November but this could make for an early demand-heavy weekend. Temperatures are projected to dip into the upper 50's, making for cooler than average weather for this time of year. The five-year average temperature for the week of October 13-19 is 65.1 degrees.

"Based on strong year to date performance, if temperatures fall within one standard deviation of the currently predicted average weekend temperature, demand should come in around 13.48 Bcf/d. During the same period last year, demand was 10.68 bcf/d. This also marks a 9% uptick in demand compared to average demand last week which came in at 12.35 Bcf/d."

Prices at Northeast points were mixed to higher as an uninspired next-day power market provided little incentive to add much in the way of incremental volume. Intercontinental Exchange reported that Wednesday on-peak power at the ISO New England's Massachusetts Hub fell 90 cents to $37.06/MWh, and  next-day power at the PJM West Hub rose $3.30 to $36.66/MWh.

Deliveries to the Algonquin Citygate were down a penny at $2.83, and gas on Iroquois, Waddington rose a nickel to $2.62. Deliveries to Tenn Zone 6 200L added 3 cents to $2.73.

The Mid-Atlantic was a mixed affair. Gas on Texas Eastern M-3, Delivery rose 3 cents to $1.23, and gas headed for New York City on Transco Zone 6 skidded 6 cents to $2.38.

Gas on the West Coast was mostly flat to lower as a weak power environment there proved difficult to overcome. Intercontinental Exchange reported that Thursday power at SP-15 fell $4.66 to $38.82/MWh, and power at Four Corners fell $3.66 to $30.75/MWh. Next-day peak power at COB came in $3.51 lower at $28.94/MWh.

Deliveries to Malin came in 2 cents lower at $2.39, and gas at the PG&E Citygate shed 2 cents as well to $3.02. Parcels at the SoCal Citygate were quoted at $2.84, up 2 cents, and gas at the SoCal Border Avg. added a penny to $2.65. Deliveries to El Paso S. Mainline/N. Baja changed hands at $2.66, down a penny.

Forecasters said weather patterns are setting up that could lead to an incursion of cold Canadian air by the end of the week.

"Fresh midday weather data continues streaming in, and we expect the pattern to remain fairly active, although important details need to be ironed regarding how weather systems develop and track across the U.S. after a brief break early next week," said Natgasweather.com in a Tuesday update.

"Until then, a fresh weather system and associated cool front continues sweeping across the Midwest, Mid-Atlantic and Northeast with showers. While it will bring a noticeable drop in temperatures of around 10 F, it more importantly will open the door for colder weather systems Thursday through Sunday, resulting in a marked increase in overnight heating demand as temperatures drop into the upper 20s and 30s for the first time this winter season."

Estimates of Thursday's EIA storage report are beginning to coalesce around an upper 90 Bcf range and "are running somewhat below our model's 104 Bcf estimate...with competing estimates centering more in the 95-100 Bcf range," said Tim Evans of Citi Futures Perspective. "Even at the lower level, the refill would still look at least somewhat bearish compared with the five-year average."

By the end of the traditional injection season, Evans expects the year-on-five-year surplus to balloon out to 211 Bcf and "with the less supportive temperature outlook, we also see somewhat higher injections than a day ago for the last week of the month.”

The increase to 211 Bcf would be "normally bearish for prices over the intermediate term; we continue to view the market as conservatively valued and sufficiently oversold that we expect the downside to prove limited. In fact, we think the market could well tread water quietly in the near term before staging a short-covering rally at the first sign of cold."

Others see a more tempered build. Stephen Smith Energy is forecasting an increase of 89 Bcf, and Ritterbusch and Associates is expecting a 95 Bcf injection. A Reuters poll of 29 traders and analysts revealed a sample mean of 93 Bcf, with a range of 86 Bcf to 104 Bcf. Last year 96 Bcf was injected and the five-year average stands at 87 Bcf.

Evans is looking to enter the market on a buy stop at $2.65 as the entry to a long position in December futures, then utilizing stop protection at $2.37 to limit risk on the trade.

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