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Eastern Gains Offset Western Weakness; Futures Flounder

The cash market on average was flat in Wednesday's trading with gains registered at northeastern points and declines noted in Southern California. Futures made new highs for the recent advance before falling prey to a double-digit drubbing as longer-term weather forecasts called for moderate temperatures in key Midwest and eastern markets and news circulated that a veteran gas trader was closing his hedge fund. At the close of futures trading June had given up 11.8 cents to $2.253 and July had fallen 11.4 cents to $2.354. June crude oil skidded 94 cents to $105.22/bbl.

Weather forecasts calling for normal temperatures in the East and even below normal at Southeast points did little to weaken eastern cash and basis. "Winter [Tetco] M-3s are trading at 65 cents [over Nymex], and the November 2012 March 2013 [TransCo] Z6 is right at $2 over and Algonquin for the same term is $2.25 over," said an eastern markets trader.

"Basis has been fairly strong and there has been talk that's somebody has gotten pinched over the last couple of days. Somebody may have gotten short the basis and gotten squeezed. The overall trend has been one of more bids than offers. Even with the Henry Hub so weak, people are realizing that basis prices can't stay low forever," the trader said.

At Northeast points prices were firm. Next-day gas on Algonquin and at Irquois Waddington were each up nearly a nickel. Gas on Tennessee Zone 6 200 L gained a few pennies more.

On the West Coast prices eased as forecasts called for continued cooling. AccuWeather.com predicted that in Los Angeles temperatures would rise from Wednesday's 67 to 68 on Thursday. The normal high in Los Angeles this time of year is 74.

Quotes at SoCal Citygate and SoCal Border and El Paso S Mainline were each off by almost a nickel.

At Northern California points prices were steady, and at $2.55 PG&E Citygate stands at a hefty 39 cent premium to Malin. "We were wondering why PG&E Citygate was so high," said a California trader.

According to the California Gas Transmission website, PG&E total system supply for May 1 fell short of demand by 87 MMcf whereas for April 30 total system supply was 80 MMcf higher than demand.

After already moving lower in early trade Wednesday, June futures pressed even lower once news circulated in the early afternoon that natural gas trading whiz John Arnold, formerly of Enron, was shuttering his Centaurus Energy Master Hedge Fund due in part to natural gas prices currently being at 10-year lows, which was resulting in lower returns (see related story). The prevailing thought was that because the fund -- which was founded in 2002 after the fall of Enron -- was a significant player in natural gas futures, the need to unload positions could swamp the market.

Traders will be taking a close look at Energy Information Administration (EIA) storage figures on Thursday to see if the data sheds any further light on what may be a nascent trend of lower production. On Monday the EIA reported that natural gas production in the Lower 48 states for February decreased slightly to 72.32 Bcf/d from January's 72.74 Bcf/d, or 0.6%. Areas showing a pronounced decline included Wyoming, down 3.5% and Louisiana, off by 4.8%.

Thursday's storage figures may indicate the trend of lower production is increasing if the expected build falls short of industry expectations. At present analysts are expecting a build in the upper 20 Bcf range, far below last year's 60 Bcf build and less than the five-year average of 79 Bcf. ICAP forecasts a build of 28 Bcf and Citi Futures Perspective is looking for a gain of 27 Bcf. A Reuters poll of 24 analysts revealed a range of 20 Bcf to 42 Bcf with an average 31 Bcf increase. Industry consultant Bentek Energy was on the low side of estimates with a 23 Bcf injection.

Futures traders were not worried that the day's decline was enough to cast doubt on the recent string of price advances. "The [advance] is a work in progress," said Tom Saal, vice president at INTL Hencorp Futures in Miami. Saal pointed to the market's ability to make two successive new highs on Tuesday and Wednesday, and "if the market can stay above $2.16, it still looks constructive."

Analysts admit that there is a lot to be done to work off the storage overhang. "What we are seeing here is that the shut-ins and curtailments are finally taking hold but still have a long way to go before shunting the storage overflow," said a New York analyst. "The weather is cooling somewhat in NOAA's [six- to 10-day forecasts], but it is really not enough. After cash released the May futures, the dime delta to June took over and we are starting to think summer burns. Cash has almost caught up now at $2.285."

Summer burns may have to wait for populous eastern and Midwest energy markets. WSI Corp. of Andover, MA, sees above-normal temperatures confined to the Northwest. "Anomalies between 3-8 degrees above normal are forecast over northwestern U.S. and the Northern Plains. Near- and below-normal readings are expected to encompass most of the rest of the country," it said in its morning 11- to 15-day outlook.

The forecast represents little in the way of changes from Tuesday's outlook, and WSI said risks to the forecast include "temperatures trend[ing] colder over much of the country than currently forecast. The medium-range models all advertise the NAO [North Atlantic Oscillation] will transition to moderate to strongly negative phase the second week of May."

Tim Evans of Citi Futures Perspective saw Tuesday's 8.6-cent June advance as indicative of a recovery. "The natural gas market took another step to the upside on Tuesday as traders have become better persuaded that a tradeable recovery in prices [is] under way, even if questions regarding the intermediate-term fundamentals remain."

Looking a little further into the future, Stephen Smith of Stephen Smith Energy Associates, said taking into account "normal weather" going forward, there could be "a better supply/demand balance for U.S. gas in 2013."

In his recently released Monthly Energy Outlook, Smith noted that at the start of April the gas storage surplus (vs. 2006-2010 norms) peaked out at 900 Bcf. However, by mid-May, he expects the surplus will likely be down to 700 Bcf, "a decline from a record surplus to only 'very large.'"

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