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Cash, Futures Part Ways as Forecasts Call For East, Midwest Warmth

The physical market for weekend and Monday gas overall fell on average by about 6 cents Friday as traders noted a typical reluctance to purchase weekend supplies amid mild weather forecasts and the weekend reductions of industrial load. Particular weakness was noted at eastern points where warm temperatures were forecast to give way to seasonal readings by Monday and southern California locations tumbled as positive imbalances were expected over the weekend. At the close of futures trading June had jumped 14.8 cents to $2.742 and July added 14.9 cents to $2.822. June crude oil continued its descent dropping $1.08 to $91.48/bbl.

Gas buyers in the Midwest reported having to walk a fine line trying to navigate customer requirements without access to storage gas. "It's a little tricky with the [May] dead month on Northern Natural. We are not supposed to be using storage gas; we can use it, but we try not to use it," said a Midwest utility buyer.

"Our electric company is kind of fickle. There is no guarantee that when they call you and tell you how much they are going to use that they will actually use it. Or vice versa when they call back and say 'we need another 10,000 [MMBtu].' We have also entered into capacity releases and that restricts our no-notice gas. It's a little tight, but when we get past May we will be able to use storage gas more freely and won't have to worry about it so much."

Quotes across the Midwest eased. Weekend and Monday gas at the Chicago Citygate fell nearly a nickel and deliveries on Northern Natural Ventura were off a few pennies. Gas on Alliance retreated just over a nickel.

According to weather forecasts, the temperatures over the weekend in Chicago were expected to be well above seasonal norms, but Monday was expected to return close to normal. Forecaster Wunderground.com predicted a high in the Windy City of 84 Saturday and Sunday and Monday was expected to reach 73, two degrees above the seasonal average.

The amount of gas production coming out of the Marcellus in Pennsylvania continues to give the market indigestion. The biggest loser on the day proved to be Tennessee Gas Pipeline Zone 4 Marcellus where a restriction prompted a 60 cent decline. Tennessee posted an operational flow order at the Rivervale meter, "due to nominations in excess of capacity" for May 19 and May 20.

Other eastern points declined as well. Tetco M-3 fell 12 cents and Transco Zone 6 NY dropped a dime.

Forecasters called for a warm weekend in New York City, but temperatures were forecast to return to normal by Monday. Wunderground.com predicted a high Saturday of 77 followed by a Sunday high of 79. Monday was expected to see a high of 72.

Prices fell at southern California points as pipeline imbalances were expected. PG&E said for Saturday and Sunday positive imbalances (supply greater than demand) would be 35 MMcf/d and 115 MMcf/d respectively, but by Monday the imbalance would shift to a negative 110 MMcf/d.

Quotes at southern California points tumbled. Socal Border fell nearly 15 cents and SoCal Citygate shed about a dime. El Paso S Mainline skidded just over 15 cents.

Weather forecasts turned warmer in the populous East and Midwest and futures prices romped higher. WSI Corp. of Andover, MA in its six- to 10-day outlook predicts that a broad northeast-southwest trending ridge of above normal temperatures will envelop the Midwest and East extending from Minnesota to Colorado and South Texas to Maine. Only portions of California and the Pacific Northwest are expected to be below normal. "Above and much above normal temperatures are now forecast over most of the central and eastern U.S. Anomalies as warm as 9-13 degrees above normal are expected to encompass the Midwest and Great Lake States."

It added that "Today's forecast is warmer over the central and eastern U.S. than it was yesterday [Thursday], and risks to the forecast include temperatures trend[ing] warmer over most of the country than currently forecast. European and Canadian ensemble models continue to advertise a more La Nina-like pattern will develop over North America in late May."

Short term traders suggested that the rise was due to traders adjusting positions. "It looked like a lot of short covering," said a New York floor trader. "There was a new high for the move, and I would have to think some stop loss orders went off. This market has been so short and is catching a lot of people by surprise."

"You might see $3. I haven't heard anyone talk of [technical] resistance. Up at these levels it's a whole new ball game. I had one client inquire about traders taking off the long crude short natural gas spreads. That may have been one of the reasons we rallied."

"Traders had that spread working for them for the longest time, and now it looks like they are unwinding it in a big way," the floor trader said.

The recent market performance has market technicians cautiously optimistic. "While Natgas came very close to breaking down Thursday, the bears could not push the market beneath $2.497-2.449 support," said Brian LaRose, analyst with United-ICAP. In his view "this zone must be broken to indicate a top is in place. "Clear $2.676 before $2.497-2.449 can be broken and we would expect further upside near term. Our next objective in this case: $2.770-2.782-2.796 ("a"="c"). Bulls proceed with extreme caution," he counseled in a note to clients.

Fundamental analysts see the dynamic of an ongoing contraction in the supply surplus continuing to drive the market higher. "The ability of this market to quickly recover toward this week's highs in the face of a seemingly bearish storage figure is providing testament to a continued strong short term bull move," said Jim Ritterbusch of Ritterbusch and Associates. "Yesterday's miss of almost 10 Bcf from average street expectations for the storage figure prompted only a brief selling spree that was rapidly followed by another strong push to the upside. But despite yesterdays larger than expected storage injection, the increase again fell significantly short of year ago and average storage hikes. This market continues to prioritize a narrowing in the supply excess over a large absolute storage level. Until this process is neutralized, additional price strength would appear to lie ahead," he said in a morning note to clients.

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