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East, Northeast Lead Broad Weather-Driven Advance; Futures Up a Dime

Natural gas for physical delivery Tuesday overall on average surged 18 cents as traders had to adjust to a changed weather outlook, a firm power pricing environment, and a strong screen. East and Northeast locations led the charge higher, but no delivery point was left unscathed by the tempest of soaring prices. Futures reached the highest point in 3 weeks, and at the close of futures trading September had risen 9.5 cents to $3.463 and October was higher by 9.4 cents to $3.487. September crude oil eased 36 cents to $107.10/bbl.

AccuWeather.com meteorologists predicted that the Midwest would be the first to experience the transition to warmer temperatures followed by the Northeast this week.

"This warmer weather is returning after several days with temperatures running as much as 10 degrees below normal in cities such as St. Louis, Cincinnati, Detroit, Pittsburgh and Baltimore. This trend in warmer weather will start over the weekend across the Midwest as heat in the Plains begins to swell eastward [and] the heat will continue to push eastward early next week, expanding across the Northeast, while building even more in the Midwest," the forecaster said.

The causative factor bringing in the heat was the jet stream moving farther north, allowing for warmer temperatures to expand farther north with it. "This push of warm air may feel like a heat wave for some following the occurrence of fall-like temperatures across the Midwest and Northeast; although no records are expected to be broken during this warmup."

AccuWeather.com predicted the high in Boston Monday of 85 would rise to 87 Tuesday and reach 89 by Wednesday. The normal high in Boston is 79. New York City's Wednesday maximum of 82 was anticipated to advance to 87 Tuesday and 89 by Wednesday. The seasonal high in New York is 83. In Philadelphia Monday's high of 80 was forecast to jump to 89 Tuesday and reach a toasty 90 by Wednesday. The normal high in Philadelphia this time of year is 85.

Strong next-day real-time power prices also helped launch next-day gas higher. IntercontinentalExchange reported that Tuesday real-time power prices at the New England Power Pool's Massachusetts Hub added $4.42 to $48.27/MWh and at the PJM West terminal real-time power for next-day delivery gained $7.28 to $47.37/MWh. Power into the New York Independent System Operator's Zone A delivery point (western New York) rose by $1.05 to $41.55/MWh.

Gas for Tuesday delivery at the Algonquin Citygates jumped 59 cents to $3.96 and deliveries to Iroquois Waddington were up by 20 cents to $4.03. Gas on Tennessee Zone 6 200 L rose by 52 cents to $3.89.

On Dominion gas for Tuesday was seen 28 cents higher at $3.23 and packages at Tetco M-3 gained 35 cents to $3.51. Gas bound for New York City on Transco Zone 6 added 34 cents to $3.64.

West Coast gas prices also firmed as strength in next-day power prices in and adjacent to California provided a firm undertone to next-day gas. IntercontinentalExchange reported that next-day peak power at SP-15 gained $1.63 to $46.76/MWh and at COB Tuesday peak power rose by $3.73 to $48.04/MWh. At Mid-Columbia peak Tuesday power was quoted at $45.67/MWh, up $4.09.

At PG&E Citygate Tuesday gas came in at $3.77, up 12 cents and parcels at SoCal Citygates rose by 14 cents to $3.72. At the SoCal Border, gas was seen up 13 cents to $3.64. On El Paso S Mainline gas changed hands at $3.72, up 17 cents.

Today's price surge notwithstanding, Alan Levine, chairman of Powerhouse, a Washington, DC-based trading and risk management firm, sees "Relatively high injections hav[ing] put a damper on rally attempts in natural gas futures prices. Elliott wave counts suggest a complete fifth wave down with the possibility of extensions below $3.00. Price support can be found around $3.10." He also notes an impact on the natural gas rig count. "The natural gas rotary rig count, as reported by Baker Hughes Incorporated, totaled 386 active units as of August 9, down 2 units from last week."

Not only did the short term outlook turn warmer, but longer term weather forecasts turned abruptly warmer over the weekend. MDA Weather Services in its morning six- to 10-day outlook shows a widespread ridge of above-normal temperatures extending from Ohio to Idaho with the greatest anomalies centered over North Dakota and Minnesota. New England, the Mid-Atlantic, Florida and Texas are all near normal.

"A much hotter outlook is favored across the Plains and Midwest as compared to earlier expectations, with a period of widespread much 'aboves' on tap," the forecaster said. "An upper-level ridge will intensify over the region early as per most major models, which will combine with a prevailing south-southwesterly flow at the surface to deliver an impressive late-season surge of heat and associated cooling demand. The West Coast has cooled some while generally under a weak trough. The Northeast will avoid the heat for the most part, instead staying near normal for much of the period.

"Despite the hotter changes, warm risk still outweighs cool risk from the Plains to Midwest more often than not, [and] New England could sneak a bit cooler at times, both early and again late."

 From a fundamental standpoint, analysts aren't impressed by the natural gas market. "Fundamentally, it's hard to get excited about the upside potential in the natural gas market," said Mike DeVooght of DEVO Capital Management. "We think the higher probability is that we continue to trade in the low $3 to the high $3 range. We feel rallies above $4 represent opportunities to do forward sales," he said in a weekend note to clients.

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