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Nearly All Points Weaken; Futures Rise On Short-Covering

Physical natural gas prices at virtually all points suffered an average 6-cent drubbing as weekend temperatures were expected to be on the mild side. Only a handful of points posted gains. Southern California was hit with double-digit declines as a temporary outage at a nuclear plant was expected to be resolved. Futures rallied on weekend short-covering, and traders see further buying should prices settle about another 10 cents higher. June futures rose 6 cents to $2.186, and July gained 5.7 cents to $2.299. June crude oil rose 38 cents to $104.93/bbl.

A continuing outage on Florida Gas Transmission (FGT) Zone 3 kept Monday gas prices in the plus column, but other Gulf points receded. "The maintenance got extended form May 1 to June 1 so that spread [between Zone 3 and Zones 1 and 2] will be there for the foreseeable future," said a Florida gas buyer. "Zone 3 is about 25-28 cents higher than Zone 1 and Zone 2 and before the maintenance they were lying on top of each other."

The buyer said he could bring in gas on Transco and "Transco is about even with the Hub, but with fuel costs we can purchase gas about 20 cents less than Zone 3."

Quotes at the Henry Hub were a nickel lower and gas on ANR SE slumped 4 cents. Deliveries on Tennessee 500 L were a couple of pennies lower, but gas into FGT Zone 3 gained a couple of pennies.

Monday prices at some California points fell by double digits, but if the analysis by a research firm is correct, high summer demand, above the five-year high, in Southern California will keep prices at a premium.

Bentek Energy said it expects "higher-than-normal natural gas demand to keep SoCal gas prices among the highest in the U.S. this summer. Generation capacity from nuclear and hydroelectric sources in California has been reduced significantly this year, and in April month to date it is down more than 4,500 MW, or approximately 10% of projected peak summer load." It added that nuclear was off 56% in April and hydropower was down a stout 43% from 2011.

These declines are due to a long-term outage at the San Onofre Nuclear Generating Station (Songs) that began in January along with significantly below-normal winter precipitation levels across the Sierras. At present not only are the Songs plants down, but Diablo Canyon Units 1 and 2 are also both offline for maintenance and problems with marine organisms, respectively. Diablo Canyon Unit 2 was expected to return to operation Monday after resolving problems with marine organisms.

The Songs and Diablo Canyon Units are just four of the 34 nuclear plants shown as either offline or producing at less than 100% of full power in the NGI NRC Power Reactor Status Report. The 34 nuclear plants' generation represents a loss of 23,565 MW out of total U.S. capacity of 100,900 MW generated at 104 facilities.

Bentek said it expects regional gas-fired generation to incrementally increase 200 MMcf/d in the SoCal market alone until August when Songs is estimated to return to service, according to Industrial Info Resources data. Based on this structural shift in power demand combined with an expected reversion to normal demand, Bentek projects that SoCal summer demand will exceed the five-year high for natural gas power demand in three of the next four months.

Bentek sees a warmer summer and "given that several key pipelines serving SoCal and the California/Southwest market are running at capacity, California natural gas supply and storage injections will be pressured to meet local power demand, along with power imports this summer. As these trends continue, SoCal and PG&E natural gas prices will experience upward pressure and are projected to remain among the highest in the U.S., especially as temperatures this summer are expected to be higher than last year," the firm said.

Monday West Coast prices tumbled. Deliveries to Malin and PG&E Citygates skidded just over a nickel, but gas at SoCal Citygates and SoCal Border dropped approximately 15 cents.

Midwest points weakened as well. Chicago Citygate, Alliance, Michcon and Consumers all dropped close to a nickel or more.

Futures traders attributed the day's gains to short-covering and said, "there are really a lot of shorts out there and they need to keep an eye on which way the market is going. If some traders get spooked, there might be a lot of guys in here buying," said a New York floor trader. "Prices could rally another 10 cents to 15 cents.

"There's a double top at $2.24 and nothing above that until $2.295 to $2.30. $2.25 to $2.30 is what people are thinking is resistance."

Before it went off the board Thursday, May futures traded up to $2.187, about 11 cents higher than Wednesday, but quickly retreated and settled with a loss of 3.2 cents. A pretty weak performance given the supportive nature of an Energy Information Administration storage report that after revisions showed far less gas available than what had been predicted.

The market may have received a shot of redemption with Friday's firm close, but the sloppy finish Thursday had technical ramifications as well. Analysts aren't quite ready to stick another fork in the market just yet. "As ugly as Thursday's candlestick was, it is important to note that the late-day pullback occurred after the intraday RSI hit dangerously overbought levels and the June contract will be rolling in at a 10-cent premium. So for the moment, the case for bottoming remains alive," said Brian LaRose, market technician with United-ICAP.

LaRose warned, however, that "to keep the case for bottoming action intact the June contract must get above both $2.148 and $2.318."

Top analysts see little change in the overall fundamentally bearish complexion of the market. "At the end of the day, nothing has really changed in this market this week or even this month for that matter," said Jim Ritterbusch or Ritterbusch and Associates. "Some voluntary production cuts are still needed to facilitate a long-term price floor in this market, and such a development has not been forthcoming.

"Consequently, production has remained elevated at levels significantly above a year ago. Meanwhile, demand-side factors such as year-over-year gains in EG [electricity generation] demand of as much as 30% have not had much bite in balancing this market. At the same time, demand improvement from the large industrial segment that counts for about a third of the natural gas consumption pie has proven modest despite a strengthening U.S. economy."

Ritterbusch is looking for a spot to go short. "We have defined a favorable sell zone within the June contract as existing within the $2.21-2.24 region, and we would suggest stop protection above the $2.30 level on a close-only basis for any existing or fresh shorts. Our downside expectations exist to the $1.85-1.90 area. In conjunction with this expected price weakening, we still expect renewed expansion in 2012 spread contangos into fresh wide territory."

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