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Cash Quotes Mostly Drift Lower, But Exuberant Futures Bounce Back

The cash market overall was lower on average by a couple of pennies Tuesday with most market areas showing quotes on either side of unchanged. California points weakened as a customer imbalance was redressed. Eastern points were mostly unchanged, and Gulf points eased. At the close of futures trading June had risen 9.8 cents to $2.707 and July had gained 8.7 cents to $2.776. June crude oil fell 91 cents to $91.66/bbl.

Northeast marketers testified to increased power generation but admitted the gains were relatively small. "We're starting to see increased power load over the last few days, small loads, not huge," said a Northeast trader. He added that the market was steady and Northeast basis hadn't changed too much. "The June Algonquin is 33 to 34 cents, and it's just waiting for the heat to come. The price is pretty low, and it's not going to stop anyone from using gas," he said.

Power loads may build going into the Memorial Day Weekend. According to The Weather Channel, heat is forecast to build from the Southwest into the southern plains and into the Ohio Valley. "The core of the hot temperatures to start the week are over the Southwest. Phoenix, Tucson and Las Vegas are soaring into the triple digits," said meteorologist Chris Dolce.

"As the week continues, much of the Intermountain West and the Southwest will see temperatures cool down as a dip in jet stream dives southward by Thursday and Friday. The opposite reaction to this is a bulge northward in the jet stream over the eastern half of the nation and a strengthening area of high pressure aloft." According to Dolce, this translates into heat later this week into the Memorial Day weekend from the central and southern Plains to the mid and lower Mississippi Valley, Ohio Valley and the Deep South.

Quotes at East and Northeast points were mixed. Algonquin Citygate was unchanged, and deliveries to Iroquois Waddington slipped a couple of pennies. Gas on Tennessee Zone 6 200 L, however, jumped by close to a nickel.

Tetco M-3 was off a penny, and gas into New York on Transco Zone 6 was flat.

The often volatile Tennessee Zone 4 Marcellus point was active. Next-day prices were up by almost a nickel. "That point has been depressed because of all the gas coming out of the Marcellus, but it [price volatility] has quieted down recently," said an eastern trader.

Prices at California points fell as Pacific Gas and Electric (PG&E) reported a large shift in customer imbalances. Actual imbalances for Monday were a stout 234 MMcf/d, but the forecast for Tuesday showed imbalances (demand greater than supply) diminishing to 133 MMcf/d.

Quotes on SoCal Border and SoCal Citygate dropped more than a nickel, and gas on El Paso Mainline S was off a couple of pennies. PG&E Citygate also eased a couple of pennies, and Malin was flat.

Gulf points were mostly steady to lower. Tennessee 500 L, Tetco E LA, ANR SE, and Trunkline E LA were all flat to off a couple of pennies, but Henry dropped a nickel.

Futures traders are looking for near-term weather to sustain the upward momentum. "We rallied right off the bat and stayed between $2.67 and $2.71, and the market feels like it wants to go a little higher from here," said a New York floor trader. Temperature-wise, "we are about normal, but I know out west in St. Louis they are looking at 15 to 20 degrees above normal. That is leading to a little bit of a rally and could sustain it for a little longer. We could be looking at $2.85 on the upside should the market spike higher in the next week or so."

Directional traders are exiting short positions in droves and adding to long positions, according to the May 15 Commitments of Traders Report. At IntercontinentalExchange, long futures and options (2,500 MMBtu per contract) rose by 30,855 to 699,381 and short positions fell by 28,144 to 116,042. At the New York Mercantile Exchange, long futures and options (10,000 MMBtu per contract) fell by 1,579 to 207,608 and short contracts decreased by 14,848 to 269,372. When adjusted for contract size, long holdings increased by 6,134 and short positions contracted by a whopping 21,884.

For the five trading days ended May 15, June futures gained 10.7 cents to $2.500.

One school of thought has it that the advance to as high as $2.74 on Friday and Monday has overly stretched what was once a fundamentally bullish case. Kyle Cooper of IAF Advisors said, "There are now indications that coal is regaining market share from natural gas. Whether this is due to solely to the price advance or coal take-or-pay contracts and high coal stockpiles remains to be seen. The temperature-adjusted supply-demand balance is much less bullish than recent weeks."

Seems like a lot of folks may have jumped on the bullish bandwagon. "CFTC data indicated another rise in the net long speculative position with the largest position since June 2011. Although CME futures open interest fell, total open interest across the complex rose to nearly six million contracts on May 15, 2012. Further speculative buying could continue to push prices higher despite a deteriorating fundamental supply-demand balance," Cooper said in a recent blog posting.

Top analysts see another week or so of market strength. "Despite the magnitude of [Monday's] selloff, it simply provided an offset to the prior session gains," said Jim Ritterbusch of Ritterbusch and Associates in a morning note to clients. "And although Friday's lows were violated, we are still leaving open the possibility of one more run into new high territory. But at the same time, we will acknowledge that the market had become stretched from a one-month up-trend line where support currently fails to develop until about the $2.52 area. For the time being, we are leaving open the possibility of a further rally to the $2.82 region.

"[S]uch an advance could easily set the stage for an eventual renewed trip back down toward round-number support at about the $2.00 area. So, although a record storage level will eventually come back to haunt this market, we feel that a continued strong trade will be seen for another week or so as institutional traders continue to pare short positions amidst chart improvement that will likely be revived by Thursday."

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