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Cash Gains, But $2.85 July Futures In Sight, Trader Says

Overall cash prices added a dime Monday as weather forecasts, pipeline maintenance and a strong screen combined forces to send prices sharply higher. Northeast points led the charge higher, but Southern California locations were not far behind. At the close of futures trading July had jumped 16.8 cents to $2.635 and August had risen 15.4 cents to $2.565. July crude oil fell 76 cents to $83.27/bbl.

"Most of the rise in the Northeast has to do with maintenance on Algonquin and Tennessee, but weather is also kicking in," said an eastern marketer. "Once it gets a little warmer, power generation use will kick in, and I think we should see another run-up Tuesday. We didn't make as much money as we would have liked."

Algonquin posted a critical notice restricting deliveries to begin Tuesday and end Wednesday. "Due to the previously posted pipeline maintenance between its Southeast and Cromwell Compressor Stations, AGT has restricted interruptible and secondary out-of-path nominations that exceed entitlements sourced upstream of its Cromwell Compressor Station (Cromwell) for delivery downstream of Cromwell."

Tennessee Gas Pipeline also posted an Operational Flow Order covering its Mahwah and Rivervale meter points. The order was set to begin Tuesday.

By mid-week warm temperatures and humidity are expected to roll in. "A ridge of high pressure will take shape across the Great Lakes region on Tuesday, the last full day of spring. The result will be unseasonable warmth with afternoon highs in the low to middle 90s from Milwaukee and Detroit to Indianapolis, Cincinnati and Louisville," said AccuWeather.com meteorologist Steve Travis.

"The heat will be nothing new in this part of the country. All of the aforementioned cities have recorded at least two 90-degree readings so far in 2012, while Detroit and Indianapolis have broken the mark four times. As the ridge shifts eastward on Wednesday, heat will arrive in places much less accustomed to these high thermometer readings. Cities as far north as Boston and Syracuse are forecast to break the 90-degree mark on Wednesday. Pittsburgh, New York City, Philadelphia and Baltimore among others along the I-95 corridor are also expected to receive a harsh welcome to summer."

The highs Wednesday are likely to bring the first 90-degree reading of the year for many cities, a noticeable change from the cool, overcast days that have dominated the last quarter of spring for much of the East. The readings are expected to continue into Thursday.

Quotes on Algonquin and Iroquois Waddington zoomed up more than 30 cents. Gas delivered on Tennessee Zone 6 200 L jumped more than a half-dollar.

Tetco M-3 and Transco Zone 6 New York gained almost a dime.

Rocky Mountain prices rose, but price differentials between Malin and Opal have dropped to the point where the economics of moving Rocky Mountain gas west to Malin have become far less attractive. "Indications that on the Ruby pipeline flows are down to 600 to 700 MMcf/d which is far below its capacity," said a Rocky Mountain producer.

"The only way that Canada can do that [move gas to Malin] is to cut prices once their storage gets full. It may not happen, though. Canadian production is down almost a Bcf/d and the Canadian gas rig count is 50. It was 76 at this time last year and Canadian production is going to fall off a cliff. The question is whether it will fall below storage fills, or are we going to squeak by," the producer said.

Rockies prices rose nominally. Opal was nearly flat and the Cheyenne Hub gained less than a nickel. Northwest Pipeline Wyoming Pool was quoted about two cents higher and CIG Mainline was up close to a nickel.

SoCal Border and SoCal Citygate each advanced about 20 cents, but PG&E Citygate was up less than a nickel.

Short term, futures traders see further gains. "I am thinking another 15 to 20 cents to the upside for the next few days," said a New York floor trader. "We'll probably see $2.85. It looks like mostly short-covering based on the way the spreads are reacting."

Before the day's stout futures gains, technical analysts were not positive that the market would continue its advance from last week. July futures added 16.8 cents for the week to settle at $2.467 Friday and tacked on another 16.8 cents Monday, and the likelihood of those gains continuing seemed doubtful. "Last weeks report suggested that the $2.230 area would be the lower edge of summer trading," said Walter Zimmermann, vice president of United-ICAP, in a weekly note to clients.

"With last week's rally natgas may have already hit the upper edge of a trading range. So despite last weeks fire-storm of short-covering our trend expectation is still neutral."

Zimmermann calculated near-term market resistance at $2.670 and $2.635. Support was pegged at $2.315 and $2.250.

Analysts are hard pressed to see any change in the overall market fundamentals but are keeping a sharp eye out for buying opportunities. "Supplies are more than adequate and demand is mediocre. Production is flattening out due to slowing drilling activity," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. "We could see drilling activity slow even more because of plummeting natural gas liquid prices over the past few weeks. On a trading basis, we will hold current short positions. If we approach the $2 level, we will be looking for long spec trading opportunities."

DeVooght currently advises trading accounts and end-users to stand aside, but those with exposure to lower market prices are counseled to hold on to an October $2.50 put position designed to cover the summer strip at a debit of 25 to 27 cents.

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