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Cash Weak Again, But Futures Inch Higher

The overall physical market tumbled on average by 9 cents Thursday as traders cited a lack of demand, a return of nuclear generation and unsupportive weather patterns.

Eastern points were especially hard hit, but Texas and Midcontinent locations were also pummeled. The Energy Information Administration (EIA) reported a build of 71 Bcf, which was almost precisely what the market was expecting, and futures prices yawned to a positive settlement. At the close of futures trading July had risen four-tenths of a cent to $2.422 and August had gained 1.0 cent to $2.481. July crude oil continued its march lower dropping $1.29 to $86.53/bbl.

The Midcontinent was handed mostly double-digit losses as buyers were hard to find. "There is nobody buying anything. The weather is mild and we don't see any usage," said an Oklahoma marketer. He added that he expected that to change in three to four days as "hot weather is coming back. There are also nuclear units coming back," and that was expected to temper the demand for natural gas as well.

According to the NGI NRC Power Reactor Status Report, 17,188 MW of nuclear power capacity was offline Thursday due to plants operating at less than total capacity or shut down. A week earlier 18,540 MW of nuclear power was down. Total U.S. capacity is 100,900 MW generated by 104 facilities.

Next-day gas on ANR SW dropped more than a dime and NGPL Midcontinent Pool was off by a few pennies less. Quotes on Panhandle Eastern and Oklahoma Gas Transmission were each about a dime lower.

East Texas points also weakened. Gas into Carthage fell just over a dime and NGPL TX OK and Katy were each down by more than a nickel.

East and Northeast prices plunged as temperatures were forecast to drop closer to seasonal norms. According to AccuWeather.com, Boston's Thursday high of 82 was forecast to drop to 70 Friday and 65 Saturday, and New York City was expecting its 81 degree high on Thursday to fall to 76 on Friday and 76 Saturday. The Thursday high of 82 in Philadelphia was forecast to ease to 79 Friday and 76 Saturday.

The National Weather Service (NWS) in southeast Massachusetts said "high pressure will move east of the area as low pressure moves into the Great Lakes Friday." NWS said increasing clouds "will result in high temperatures in the middle 70s [at] most locations. With light winds in the boundary layer...expect sea breezes to develop on the East Coast so temperatures will be cooler (in the upper 60s) along the coast."

Quotes on Algonquin Citygate were lower by nearly 20 cents and gas delivered to Iroquois Waddington was almost 15 cents lower. Gas into Tennessee Zone 6 200 L fell more than a quarter.

Other eastern points weakened as well. Tetco M-3 and Transco Zone 6 both fell by more than a dime.

California points seemed to escape much of the weakness of the rest of the country. SoCal Citygate was flat, and SoCal Border added a penny. PG&E Citygate fell close to a nickel.

Futures traders noted that after initial weakness following an inventory report that was pretty much on target, prices managed to recover. "The market closed on a positive note, and that is a good sign because we had literally been coming in lower for the last two weeks, give or take," said a New York floor trader. "We are probably settling into what traders consider a reasonable price between $2.30 to $2.50. I would think if there were sell stops they would be under the $2.30 level."

The 10:30 a.m. EDT release of storage data by the EIA showed traders that the ongoing contraction in the storage surplus was indeed still under way, but before its release it was unclear what the impact on prices would be. Tim Evans of Citi Futures Perspective had forecast a bullish build of 59 Bcf, well below industry peers who had estimated close to a 70 Bcf increase. The 70 Bcf increase "would be a supportive figure compared with the 99 Bcf five-year average refill for the date but not as bullish as our model's 59 Bcf estimate. A build of more than 59 Bcf would indicate some weakening of the market's background supply-demand balance, possibly on some shift in utility demand away from natural gas and back toward coal," he said Wednesday.

Other estimates were about 10 Bcf higher. IAF Advisors of Houston forecast a build of 70 Bcf, and industry consultant Bentek Energy correctly predicted an increase of 71 Bcf. A Reuters survey of 18 traders and analysts revealed an average gain of 70 Bcf with a range of 59-82 Bcf.

Inventories currently stand at 2,815 Bcf, and the EIA estimates storage capacity at 4,103 Bcf. With 23 weeks left in the traditional injection season, that leaves an average weekly build of just 56 Bcf required to "fill" storage.

The year-on-five-year surplus currently stands at 724 Bcf, and Evans saw the surplus falling to 601 Bcf as of June 15 if his model were correct. "The primary bearish risk to this forecast is if power utilities react to the recent recovery in natural gas prices and weaker coal price performance by switching back to coal. The potential loss of this pickup in market share may limit the upside for natural gas prices over the near to intermediate term while we wait for some confirmation that U.S. natural gas production has moderated, which we see as necessary to support a more sustained recovery in price."

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