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SoCal Traders Ponder Uncharted Waters; NatGas Cash, Futures Slip Lower

Natural gas for Wednesday delivery slipped lower in concert with a weak screen in Tuesday's trading as healthy gains at eastern points were unable to offset slumping quotes at Rockies, California, Gulf and Midwest points.

The NGI National Spot Gas Average fell 5 cents to $1.77, but gas in the East averaged gains close to a dime. Futures fell back to the low end their trading range with June slipping 7.5 cents to $1.980 and July shedding 5.3 cents to $2.146. July crude oil added 54 cents to $48.62/bbl.

Indications are that Southern California may be in for interesting times this summer without the balancing capabilities of Aliso Canyon (see related story). "With it being out of commission, SocalGas [Southern California Gas Co.] will be in a situation they have never experienced before," said a western industrial end-user with facilities directly affected by SoCalGas.

"The storage option of a place to park gas is gone, and in the summer you had a facility in the Valley unaffected by the bottleneck at the border where you could do gas-fired generation. There is nothing in California but gas-fired generation. They don't even want coal-fired generation imported.

"There are some really strange things, and I don't think we have ever gone down this path before, and I don't know how it's going to play out."

Given large calls on power during a hot Southern California afternoon, one can only imagine the stresses placed on gas users. With only a pipeline to serve the balancing requirements of a large metropolitan area, power shortages seem a likely possibility.

For the moment, Aliso Canyon is under a moratorium on injections at the facility until all 114 wells are tested or removed from operation. According to Genscape research analyst Joe Bernardi, "There are some concerns this summer regarding system flexibility, specifically when it comes to meeting fluctuations in demand in the L.A. basin during a single day. Intraday flexibility is limited by geography: Aliso's location near the basin allows it to meet demand there more rapidly than the other three storage fields on SoCal, which are either small (Playa del Rey) or far enough from the basin (Honor Rancho and Goleta) that the pipeline's speed-of-flow rate is a major limiting factor to quickly meeting demand."

Next-day gas at California points softened. Deliveries to PG&E Citygate shed 5 cents to $1.94, and parcels at the SoCal Citygate were off 5 cents as well to $1.99. Gas priced at the SoCal Border Avg. Average lost 4 cents to $1.81, and deliveries to El Paso S. Mainline/N. Baja fell 4 cents to $1.82.

Except for the exuberant Northeast, major market centers were also down. Gas at the Algonquin Citygate jumped 34 cents to $2.26, but packages at the Henry Hub came in 4 cents lower at $1.91. Gas at the Chicago Citygate shed 3 cents to $1.87, and deliveries to Opal were quoted 4 cents lower at $1.74.

Analysts see the market in the longer term struggling to develop much in the way of upward momentum. "Attempting to develop a scenario that would carry nearby futures much more than 10-15 cents from current levels within the next couple of weeks remains difficult as the shoulder period moves into an advanced stage," said Jim Ritterbusch of Ritterbusch and Associates in a Tuesday morning note to clients.

"Although some weekend updates to the short-term temperature views spiked a significant advance at the start of this week, these gains were erased as the specter of a near-record storage level remains as a deterrent to sustainable price strength. The weather factor that has generally tilted bullish in recent weeks given some HDD accumulation is generally being viewed as a necessary ingredient toward price stability as weekly injections will need to be downsized by around 20% during the next five months in order to preclude a challenge of storage capacity. So short of a hot summer or some unexpected supply disruption, this market will have much difficulty piecing together a meaningful price advance."

Technical analysts don't see a meaningful advance either. "With a large shooting star top forming on the daily candlestick chart, there is a good chance we could be looking at lower prices in natgas as we head into June expiration," said Brian LaRose, a market technician with United ICAP.

"However, it is important to note that July is still commanding a 15-cent premium. So even if June dumps to the $1.903 vicinity, July is likely to hold $2, about where we are trading now. For that reason our trend will stay at neutral."

Gas buyers for Wednesday will have a number of weather patterns to deal with but little in the way of anything likely to materially affect demand. "Active weather will impact the Plains on Tuesday, while temperatures stay below normal over the West Coast," said Keri Strenfel, a Wunderground.com meteorologist.

Wind generation is expected to be light across MISO, and "an area of low pressure will drift north northeast over southern New England. This system will usher showers and embedded thunderstorms across the northern Mid-Atlantic and New England. Showers and thunderstorms will also develop over the Florida Peninsula on Tuesday."

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