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SoCalGas, Storage Under Microscope; Futures Add 4 Cents

Physical natural gas traded for Tuesday delivery survived a tug-of-war between firmer quotes at California, Rockies and Eastern points and softer prices from Texas, Louisiana, the Midcontinent, and Midwest market zones with the nod going to Texas and Louisiana, et al. The NGI National Spot Gas Average eased a penny to $3.09.

Cool, wet weather in the Los Angeles area prompted high gas usage, with quotes at the SoCal Citygate vaulting well over Border and PG&E Citygate readings. Futures survived early weakness to close in positive territory despite uninspired weather forecasts.

The February contract rose 3.9 cents to $3.243 and March added 4.6 cents to $3.257. March crude oil dropped 47 cents to $52.75/bbl.

Southern California Gas Co. (SoCalGas) warned Sunday that cold weather in addition to the loss of its main local storage resource may put normal electric and natural gas deliveries at risk across Southern California this week. The utility asked its customers to reduce natural gas use, turn down their thermostats and take other steps "to help lower the risk of possible natural gas and electricity shortages.”

"SoCalGas sendouts for Monday are high, 4.1 Bcf/d," said EnergyGPS principal Jeff Richter.

"Cash gas at the SoCal Border Avg. at $3.28 is 13 cents over the Henry Hub, so are they in dire need? We can only speculate, but if it’s just 13 cents over it doesn't seem like too much of a dire need.

"Everyone is on high alert and if they have to they will curtail. With 4.1 Bcf/d demand and you only get 3.1 Bcf/d from the border so the question becomes do you take out of Aliso Canyon or not? If so, you are, if not you are curtailing.

"SoCalGas said two weeks ago they were still sitting on 15 Bcf, so they haven't pulled any out," said Richter.

Next-day gas in California showed the highest quotes at the SoCal Citygate.

Gas at Malin rose 6 cents to $3.17, and deliveries to the PG&E Citygate slipped 2 cents to $3.54. Gas at the SoCal Citygate shot up 19 cents to $3.66, and deliveries to the SoCal Border Avg. were quoted at $3.29, up 13 cents. Gas on Kern Delivery added 15 cents to $3.31.

"There aren't fireworks going off everywhere saying 'we are curtailing gas, we are curtailing gas,' but I guarantee you they are watching it," said Richter. The "last time they posted a 4 Bcf sendout, the actual figures came in a 3.65 Bcf/d, so either they curtailed, or demand wasn't as great as anticipated. You will never get full transparency."

Other trading points were mostly lower. Gas at the Chicago Citygates changed hands a nickel lower at $3.13, and gas at the Henry Hub came in at $3.15, down 6 cents. Deliveries to El Paso Permian fell a penny to $2.99, and parcels at Opal rose a dime to $3.15.

Longer term weather forecasts suggested a possible Alaska ridging, which could usher in more seasonal (colder) temperatures in the East.

"Forecast trends over the weekend were in the warmer direction and focused in the central U.S. late in the period; however, this time frame [six- to 10-day] remains one of transition as below-normal temperatures span along the southern tier," said MDA Weather Services in a Monday morning report to clients. "This coverage of 'belows' is expected to linger through late period in the Southeast, while being transient in nature and giving way to warmer anomalies late in Texas.

"The variability versus that of the near term is related to a buildup in ridging near Alaska, a feature which will allow for nearer-term warmth to quickly break down and result in a seasonal period for the East. Warmer risks are seen in Texas, especially late and based on model biases. The eastern third could be warmer as well, with this likewise related to model biases and a warmer Euro [Ensemble] projection."

The Desk in its Early View survey of the week's storage report showed expectations to be far below historical norms. From a sample of 12 traders and analysts, the average was 112 Bcf, well below last year's 202 Bcf and a five-year average of 176 Bcf.

Risk managers were keying on weather for their price forecasts.

"If we see colder than normal temperatures for the balance of the winter, we could see the gas market retest the $4," said Devo Capital President Mike DeVooght. "If temperatures start to trend warmer, we could very well see gas back at $3 by the end of the heating season.

"Looking forward into mid-2017-early 2018, we feel the gas market is going to have a difficult time holding above the mid $3 range as takeaway capacity out of the Marcellus and Utica expands."

DeVooght currently is advising trading accounts to stay short February futures from $3.70; end-users should stand aside.

Producers and physical market longs should hold the remainder of an August 2016-July 2017 $2.70 put strip offset by the sale of August 2016-July 2017 $3.50 calls. He also recommended holding a $2.75 put and selling a $3.75 call paying 7 cents.

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