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Bears Maintain Grip on NatGas Futures as Demand Fall-Off Sinks East Coast Cash

Natural gas futures fell again Friday after taking out support earlier in the week, with some wintry conditions predicted for late December not enough to inspire a rally. In the spot market, forecast demand declines meant tempered interest in three-day deals, and the NGI National Spot Gas Average fell 12 cents to $2.73/MMBtu.

The January contract settled 7.2 cents lower at $2.612, a characteristic end to another bearish week for natural gas. February settled 6.9 cents lower at $2.635.

Bespoke Weather Services said it continued to view the recent declines as balance-driven, noting that "the entire strip sold off almost equally" Friday. "Our sentiment into the weekend remains slightly bullish because of the potential for sizable heating demand additions in the eight- to 16-day forecast.

“Models have gradually been decreasing the southeastern ridge that was shown at the beginning of the week," a development favorable to additional cold moving into the East in late December.

The long-range forecast trended colder through Friday, “in line with expectations,” said Bespoke. “What has not been in line with expectations has been the ensuing natural gas price action response, as prices continued to follow the trend of the last few weeks of stabilizing (but not rallying) on colder trends and then selling off on the first sign of warmer weather."

In a Friday afternoon update to clients, NatGasWeather.com said the most recent run in the European model "wasn't as cold" as it was Thursday night "but was still colder than previous days. A relatively cold solution with periods of frigid air across the northern and central U.S.” late in the week ahead “and beyond, but still a bit too warm over the Southeast.

"Tough to know how the models will trend over the weekend with so many flip-flops...on the strength of the eastern U.S. ridge Dec. 23-29," NatGasWeather said. "Much larger than normal draws on supplies versus the five-year average are still expected two of the next three weeks, making selling this week appear to be primarily driven by record high production."

Asked about the recent sell-off in futures, Powerhouse's Elaine Levin, president of the Washington, DC-based risk management firm, said, "Ultimately, something changed" to cause the market to break below a long-standing trading range of around $2.75-3.20. "Buying this market around $2.75-2.80 would have been a rewarding trade going back to the summer."

Analysts with Tudor, Pickering, Holt & Co. said Friday the recent price action was "a bit of a head-scratcher, especially as the Climate Prediction Center (CPC) increased the probability of La Nina lasting through the winter from 65-70% to more than 80% Thursday."

The CPC said in its updated outlook that "La Nina is anticipated to affect temperature and precipitation across the United States during the upcoming months...The outlooks generally favor above-average temperatures and below-median precipitation across the southern tier of the United States, and below-average temperatures and above-median precipitation across the northern tier of the United States."

PointLogic Energy said in a note to clients Lower 48 production for the week ended Friday averaged 76.1 Bcf/d, roughly flat week/week. That's up from a little above 70 Bcf/d in January, PointLogic data indicate. According to the analytics firm, the Northeast showed the largest week/week gain by region at 0.7 Bcf/d, including a 0.3 Bcf/d gain in the Marcellus-West Virginia Wet area.

With new takeaway capacity set to come online, the recent growth in Appalachian output looks likely to continue. On Friday, the Federal Energy Regulatory Commission authorized Rover Pipeline LLC to begin service on three eastern Ohio supply laterals and associated compression, clearing the way for the pipeline to tie additional receipt points to its Mainline A. Rover has been flowing around 500 MMcf/d east-to-west recently but is designed to eventually transport up to 3.25 Bcf/d.

Analysts with Goldman Sachs said in a report released a few days ago that they see "Henry Hub upside this winter, but as new Appalachian capacity comes online Henry Hub prices should moderate while local Appalachian prices should strengthen. We see gas storage levels poised to move below normal through the first half of 2018, which provides an attractive near-term setup.

"However, we expect 15 Bcf/d of pipeline takeaway to come online to take gas out of Appalachia by 2019,” Goldman analysts said. “We do not expect production to grow by this amount immediately...We maintain our $3/MMBtu Henry Hub forecast for 2018. We see local Appalachian differentials moving towards $0.25/MMBtu below Henry Hub to keep Appalachian pipes below full utilization."

In the spot market Friday, expectations for demand to fall by Monday (Dec. 18) proved enough to sink prices at a number of East Coast points. After peaking at 95.3 Bcf/d Thursday, PointLogic forecast Lower 48 demand to fall to 75 Bcf/d by Monday, analyst Rishi Iyengar said.

"Our weather forecast continues to predict warmer population-weighted temperatures for the Lower 48" heading into the weekend, "rising from 40 degrees Friday to 48.9 degrees on Monday," Iyengar said.

Transco Zone 6 New York plummeted $1.85 to average $3.22, while Transco Zone 5 gave up 25 cents to $2.74. Transco said it would be lifting an operational flow order (OFO) starting Saturday that had been in effect for Zones 5 and 6 because of high demand.

"Circumstances leading to the issuance of the OFO are expected to improve; however, Transco has limited flexibility to manage large imbalance swings and strongly encourages all shippers to manage their system requirements to ensure a concurrent balance of receipts and deliveries daily," the pipeline told shippers Friday.

In Appalachia, Dominion South fell 7 cents to $2.07, while Columbia Gas dropped 9 cents to $2.46.

Genscape Inc. was forecasting demand in the Appalachia region, including New York and New Jersey, to decrease from 18.2 Bcf Thursday (Dec. 14) to just under 14 Bcf by Monday.

In New England, Genscape models showed demand declining from 4.05 Bcf Thursday to just above 3 Bcf by Monday. Iroquois Zone 1 dropped 83 cents to $3.64, while Iroquois Zone 2 fell $1.54 to $3.65. The constrained Algonquin Citygate, moved the other way, adding 20 cents to $7.63.

Out West, SoCal Citygate recorded another day/day jump after setting new two-week lows earlier in the week. Prices there climbed 85 cents to $4.71.

Southern California Gas (SoCalGas), dealing with ongoing import constraints, reported withdrawing 242,000 Dth from storage Thursday to go with nearly 2.57 million Dth of receipts. SoCalGas was forecasting total system demand to exceed 3 million Dth on Monday, with a forecast storage withdrawal of 485,852 Dth.

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