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Cautious Physical NatGas Buying Emerges Before Long Weekend; Futures Stage Modest Rally

Physical natural gas for the extended holiday weekend gained ground as traders elected to use pipeline and storage capacity for incremental purchases.

East Texas, South Louisiana and the Northeast led the gains, and the NGI National Spot Gas Average rose 7 cents to $1.74. Futures opened weak and seemed poised to trudge lower, but by mid-session, short-covering was able to lift prices into positive territory, if only temporarily. At the close July had added 1.8 cents to $2.169, after trading as low as $2.101, and August had risen 2.0 cents to $2.281. July crude oil shed 15 cents to $49.33/bbl.

"We saw a lot of things going on. People were parking a lot of gas this weekend, and demand for that probably created a little uptick here and there," said a Houston pipeline veteran. "They will park it on the pipeline or in storage. You are buying for a four-day weekend and it does take a little wherewithal to figure that out."

Gas at the Henry Hub rose 4 cents to $1.79, and deliveries to the Chicago Citygate were quoted 3 cents higher at $1.86. Gas at Opal fetched $1.60, or 2 cents higher, and deliveries to the PG&E Citygate rose 4 cents to $1.78.

Northeast gains outpaced major trading centers. Gas at the Algonquin Citygate rose 6 cents to $1.92, and deliveries to Iroquois Waddington gained a nickel to $1.94. Deliveries to Tennessee Zone 6 200 L were flat at $1.85.

Futures traders thought "the market got off the ground like James Brown. It looks like short-covering and not any new longs and people were taking some money off the table ahead of the long weekend," said a New York floor trader. "If nothing happens the market is set up to get heavy again on Tuesday."

Near term, markets may appear weak, but longer-term analysis shows a more re-balanced market and presumably higher prices by fall. LNG exports and anticipated production declines have analysts tempering their season-ending storage estimates.

"Supply is declining (down 2.8 Bcf/d, about 4% year over year in April) and should accelerate on disinvestment while gas continues to take market share from coal," said Jonathan Wolff, an analyst with Jefferies LLC. "With this note, we are incorporating LNG demand for new U.S. liquefaction (0.3 Bcf/d) into our model. Our seasons-end storage estimate falls to 4.0 from 4.1 Tcf."

With the 71 Bcf reported Thursday "the refill is very light compared to last year's 112 Bcf injection and the five-year average of 94 Bcf. Injections have been below prior-year levels in all nine weeks for this refill season thus far.

"Thus far during the 'refill' season, injections have been at the lowest level over the past five years. Only 332 Bcf has been injected into storage, well below prior year levels of 622 Bcf, down about 47% year over year. This compares to the five-year average injection of 468 Bcf.

"We continue to believe that injections will remain subdued throughout the summer, on falling U.S. supply on severe disinvestment and northeast bottlenecks. Demand from power and exports (Mexico) continue to increase. Given strong flows into the Sabine Pass liquefaction facility on the Gulf Coast (about 500 MMcf/d over the past two months), we are for the first time including LNG demand in our supply-demand model.

"As with our supply model, we are updating our refill season supply-demand 'factor' model for LNG exports. We now model about 300 MMcf/d of demand for LNG 'manufacturing' from Sabine Pass Train 1, which we feel is still conservative as the terminal has been running at about 500 MMcf/d over the past two months. We now see Nov. 1 storage at 4.0 Tcf, down from 4.1 Tcf previously, just about 220 Bcf (about 6%) above normal levels."

Near-term weather was expected to be active but take the form of rain and thunderstorms with little impact on gas demand. "A deep trough of low pressure will push east northeastward across the southern Rockies and the Plains. Daytime heating will trigger showers and isolated thunderstorms over parts of the Sierra Nevadas and the southern Rockies," said Keri Strenfel, a meteorologist with Wunderground.com.

"Moisture from the Gulf of Mexico will move northward across the Plains and the Midwest. The aforementioned trough will interact with this moisture, which will lead to widespread rain and thunderstorms. Severe thunderstorms will be possible in eastern Texas, southern Oklahoma and southwest Arkansas. These thunderstorms will be capable of producing large hail, dangerous straight-line winds and isolated tornadoes. In addition, heavy rain will bring threats of flash flooding to eastern Texas, eastern Oklahoma, northwest Louisiana, Arkansas, southern Missouri, northeast Iowa, southeast Minnesota and western Wisconsin."

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