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A Tale Of Two Markets; Cash Gains and Futures Ease

Overall average physical gas prices rose on average less than 3 cents Monday, but an increase in loads at Northeast points and restrictions at California locations pushed prices in those areas to double digit gains. Futures slumped lower and by the end of the day July and August contracts had each fallen 8.1 cents with the July landing at $2.218 and the August settling at $2.263. July crude oil shed $1.40 to $82.70/bbl.

"We are seeing opportunities in taking gas from western Pennsylvania and moving it to New York. In general the places you have the ability to sell to somebody who has the capacity into the New York area enables you to make some deals," said an east coast marketer.

He added that it might be possible to buy and sell gas with as much as a 30 cent margin, but "It all depends. Power plants have to sell their output to the grid, and then they have to come in and burn gas. If there is capacity at the interconnect that you can get from a utility and if you have the right market with the right connections, it can be done. There are just a handful of folks able to do all that," he said.

"I wouldn't say that these opportunities are available to everyone, but there are times you can do almost anything. You can move gas around the upper New York region without having to venture into the Marcellus at all and still make a good spread."

Venturing into the Marcellus would have proved profitable Monday. Quotes on Tennessee Zone 4 Marcellus were near $1.80, but gas delivered to the Algonquin Citygate was upwards of $2.50.

Other Northeast points were firm as well. Deliveries to Iroquois Waddington and Tennessee Zone 6 200 L added about 15 cents apiece.

Further south and west gas on Dominion South was quoted a couple of pennies higher, and deliveries to Tetco M-3 rose by 3 cents.

At southern California points next-day deliveries jumped by double digits as pipeline restrictions lifted prices across the SoCal system. SoCal Gas declared an operational flow order system-wide Sunday, and the limitation of supply to all southern California points pressured prices for deliveries Tuesday. SoCal said there was too much gas and not enough pipeline capacity.

At SoCal Citygate next-day prices rose more than a dime and at SoCal Border next-day deliveries jumped more than 15 cents. Kern Delivery was up well over a dime and El Paso S Mainline added almost 20 cents.

Gulf points were mainly flat. Henry, Houston Ship Channel, ANR SE, Trunkline E LA and Tennessee 500 L were all flat, but Columbia Gulf Onshore was down by a couple of pennies.

Futures traders were witness to what looked like a slow motion sinking. "We just treaded lower and lower throughout the day," said a New York floor trader.

"Prices are very weak across the board, and we are in the lower spectrum of the $2s. $2.23 was 62% of the range from $1.902 to $2.758 and prices got through there but just didn't drop. $2.20 is a pivot point off the Bollinger Band low, and $2.15 is the next area underneath."

"All the technical points held for now and we traded slightly higher off them. The market just dragged lower all day long," he said.

Top analysts don't see much of a change in the supply-demand landscape but are positioned to strike should prices ever reach the $2 mark. "[S]upplies are more than adequate; production might be flattening out because of slower drilling activity, but not enough to dent supplies. There has been a lot of talk of end-users locking up long-term supplies, which could very well put a floor under the market," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

Even with prices as low as they are, DeVooght contends that there is little reason for end-users to buy at this time and hints that lower oil prices may eventually drive drilling rates lower still. "[T]here is little reason for these end-users to 'pay up' at this time. One factor that could have a significant impact on future drilling budgets is the plummeting liquid prices (down by 20%-40%). These liquids that were flirting with record highs just weeks ago were cushioning the extremely low dry gas prices. If the slide continues, drilling in the liquid-rich shale plays might not look real attractive. Ultimately, if drilling really falls off, we could see a much tighter market down the road."

From a risk management perspective, DeVooght counsels traders and end-users to stand aside. Those with exposure to lower prices should continue to hold October $2.50 puts designed to cover the summer strip purchased earlier at 25-27 cents.

The near-term weather outlook can only be considered mildly supportive. WSI Corp. in its six- to 10-day outlook shows a ridge of warmer-than-normal temperatures centered over Wisconsin and trending northeast by southwest. The Atlantic Seaboard, for the most part, is normal with the Southeast trending below normal.

"Temperatures from the Northeast to the Upper Midwest-Northern Plains are expected to average 5-8 degrees above normal during the period. The Upper Midwest-Great Lakes region is warmer than indicated [Sunday] but there are few other notable differences," the forecaster said.

WSI said risks to the forecast include "temperatures run[ning] warmer than forecast across portions of the Midwest most days. A southwesterly mid-upper level flow is expected for the balance of the period upstream of a building ridge. The Southwest could trend warmer late in the period as the European ensemble mean solution, in particular, indicates the PNA [Pacific North American pattern] phase will turn negative."

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