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Weekly NatGas, Futures Diverge; January Vaults 26 Cents

In what might be a sign of things to come, natural gas futures moved higher, in spite of weekly physical natural gas prices continuing lower. The NGI Weekly Spot Gas Average fell 11 cents to $1.60, but January futures jumped over 25 cents.

The point showing the week's greatest gain was the SoCal Citygate, up 14 cents to $2.49, and the week’s biggest loser turned out to be a race between Algonquin Citygate, down 68 cents to $1.36, and Transco Zone 6 New York skidding 53 cents to $1.10. Regionally, the Northeast grabbed the cellar with a decline of 33 cents to $1.12, and California came out on top with a 3-cent rise to $2.24.

South Texas shed 11 cents to $1.54 and both East Texas and South Louisiana gave up 7 cents to $1.61 and $1.58, respectively.

The Midcontinent fell a nickel to $1.64; the Midwest was off 4 cents to $1.74, and the Rocky Mountains retreated 3 cents to $1.86.

January futures not only posted a 26.2 cent gain, but also hurdled the $2 bar Thursday as the Energy Information Administration (EIA) reported a relatively hefty 32-Bcf withdrawal, about 7 Bcf more than what the market was expecting. For the day January futures added 4.6 cents to $2.029 and February rose 4.3 cents to $2.079.

The bigger-than-expected storage withdrawal on Thursday put inventories at 3,814 Bcf and January futures rose to a high of $2.040, but by 10:45 a.m. EST January was trading at $2.011, up 2.8 cents from Wednesday's settlement.

Prior to the release of the data, analyst estimates were in the 25 Bcf withdrawal area. Tradition Energy was looking for a pull of 30 Bcf, and a Reuters poll of 22 traders and analysts showed a range from -13 Bcf to -38 Bcf, with an average -25 Bcf. IAF Advisors calculated a 21 Bcf withdrawal.

On paper, the reported storage pull looked supportive, but little change was noted in burdensome inventory levels. "The 32 Bcf net withdrawal from US natural gas storage was more than expectations and so supportive for prices, even though this was still a very small pull from storage for this time of year, far below the 121 Bcf five-year average level," said Tim Evans of Citi Futures Perspective. "We don't know what's behind the miss, but it's possible that either natural gas has picked up some power sector demand via coal-to-gas switching at the lower price levels or that some supply was shut in. In any case, the draw for last week confirms a modestly tighter balance compared with recent flows."

Inventories now stand at 3,814 Bcf and are 561 Bcf greater than last year and 471 Bcf more than the five-year average. In the East Region nothing was pulled, and the Midwest Region saw inventories fall by 15 Bcf. Stocks in the Mountain Region fell by 5 Bcf, and the Pacific Region was down 15 Bcf. The South Central Region, similar to the former Producing Region, added 3 Bcf.

In Thursday's trading natural gas for delivery over the extended holiday period posted gains as strong weather-driven advances in the Rockies and California were able to outperform softer points more aligned with the Henry Hub.

The NGI National Spot Gas Average gained 3 cents to $1.56. Losses of close to a dime at the Henry Hub were countered by double-digit advances in the West.

Western points vaulted past the Henry Hub as a western storm system began a march eastward. AccuWeather.com forecast that Denver's high Thursday of 39 degrees would drop to 32 Friday and a chilly 19 by Saturday. The normal high in Denver is 32 in late December. Los Angeles' high for Thursday of 63 would slide to 60 by Friday and 59 Saturday, eight degrees below normal.

Gas at Cheyenne rose a penny to $1.64, but quotes on Kern River jumped 19 cents to $2.21. At Opal extended weekend packages were quoted 20 cents higher at $2.23, and parcels on Northwest Sumas changed hands 22cents higher at $2.30.

Deliveries to Malin were seen 20 cents higher at $2.30 and at the PG&E Citygate gas was quoted up 7 cents to $2.54. Gas at the SoCal Citygate was seen 8 cents higher at $2.58, and the SoCal Border Avg. jumped 17 cents to $2.26.

Gas at the Henry Hub dropped 8 cents to $1.54.

Traders see the current emphasis on weather forecasts diminishing once the market begins focusing on the post-holiday period. As is the case in the liquids, we feel that this week's price rebound is being accentuated by a thin holiday related trade," said Jim Ritterbusch of Ritterbusch and Associates in a note to clients. "While conceding to some shifts in the temperature views spread mainly across the first week of January, we are still not seeing any cold patterns on the horizon capable of making a significant dent in a large supply overhang. However, we will concede to a significant strengthening in the front switch this week in which the Jan-Feb differential has been more than halved from around 12 cents to less than 5 cents with the approach of Tuesday's expiration.

"Although much winter lies ahead, we expect the impact of daily shifts in the weather forecasts to lessen after the New year as heavy focus will continue to be placed on a large season ending supply north of the 2.4 Tcf level in our opinion. We are maintaining a bearish stance for now as we have suggested fresh shorts north of the $2 mark per February futures. Stops would be advised above the $2.21 level on a close only basis. And although we may be forced to adjust our ultimate downside target of $1.61 upward to this month's January contract lows of $1.68, risk-reward of more than two to one still appears accommodative toward new short holdings."

AccuWeather.com meteorologists reported that "The last storm in a long train of systems from the Pacific Ocean will drop southward along the Pacific Coast, while spreading precipitation inland to end this week. The storm will put plenty of fresh powder down in the Sierra Nevada, as a Christmas present for skiers and boarders, but the storm will bring its share of problems for holiday travelers," said meteorologist Ken Clark,

"The southward-tracking storm will pull cold air with it and result in low snow levels from Washington to Southern California, as well as areas well inland over the West. Cold weather will have much of the West in its grasp with areas of snow into Christmas Day," Clark said.

Wednesday's medium term outlooks were calling for less moderation in the near term. WSI Corp. in a morning report to clients said "[Wednesday's] 6-10 day period is generally colder or not as mild as previous forecasts across the majority of the nation. CONUS GWHDDs jumped up by 10.4 to 127.9 for the period. Forecast confidence is considered average today as medium range models are in modest agreement with the overall large scale pattern. There is uncertainty with the details of a storm system early in the period and the day to day details.

"The forecast has room to sway in either direction given the day to day uncertainty with a storm system(s). The Northeast and central US have a slight risk to the colder side. The West Coast and Southeast have a slight upside risk."

Longer term natural gas traders might do well to start anticipating the end of the current El Niño and factor in the emergence of its sister climate phenomenon, La Nina, which could be next to upend weather patterns and potentially wreak havoc on the agricultural commodity and energy markets.

According to a Wall Street Journal (WSJ) report "government forecasters in Australia and Japan have in recent weeks said the current El Niño may already have peaked and will ease through the first half of 2016 as temperatures cool on the subsurface of the eastern Pacific Ocean.

"By the start of December, this year's El Nino-the strongest since 1997-1998-had caused sea surface temperatures to rise by more than 3.6 degrees Fahrenheit in places, and driven a rally in agricultural commodities such as palm oil, sugar and dairy." It also has prompted an implosion in natural gas prices to the lowest levels in 14 years.

"The end of an El Nino event is often followed by the reversal of the phenomenon, known as La Nina, although that isn't a given. While El Nino and its impact might be better known, prices for crops such as soy, corn and wheat can move around 50% more during a La Nina event, based on a measure of the volatility of prices, said Erik Norland, senior economist at CME Group from New York.

A La Nina could also encourage a much more active Gulf hurricane season, as El Ninos are widely credited to being able to shear apart the westerly waves during the June-November Atlantic season,

A simple price response may also be in the mix."The impact of La Niña may not be limited to agriculture. The La Niña that lasted from 1998 through to 2000 caused colder-than-normal winters in the U.S. and Canada, sending prices of natural gas higher, according to CME Group.

Adrian Redlich, chief investment officer at Merricks Capital, a Melbourne-based firm that runs a US$350 million soft-commodities fund, said investors could be underestimating the impact of the current El Niño and the possible La Nina, WSJ said.

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