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Seasonality Cited For Puzzling Cash, Futures Advance

Physical natural gas for Tuesday delivery jumped 10 cents Monday with practically all points well into the black and some locations solidly into double-digit gains. Traders wearing both cash and futures stripes were circumspect, with some noting a seasonal tendency for prices to advance. Also in play was the development of a system in the Caribbean southwest of the Cape Verde Islands.

At the close of futures trading, November had added 12.3 cents to $3.629 and December tacked on 11.4 cents to $3.788. November crude oil fell 81 cents to $103.03/bbl.

"We're so well hedged, it may not matter, but we'll take it," said a Rocky Mountain producer of the day's gains. "I don't know why the market is up. The loss from [tropical storm] Karen may be 10 Bcf, and there may be some cooling demand lost on shore. Alabama is the fourth largest hydroelectric producer and with all that rain they are getting I can't see it."

This month "to November is very strong seasonally, and it doesn't seem to matter if you have a hurricane or not. It's been pretty persistent. That's the only thing I can think of," the producer said.

In its 2 p.m. EDT Monday report, the National Hurricane Center (NHC) said it was monitoring two systems in the Atlantic. The first was midway between Puerto Rico and Bermuda and was given a 10% chance of becoming a tropical cyclone within five days. The second system was several hundred miles southwest of the Cape Verde Islands and NHC said conditions were favorable, with a 40% chance of development over the next five days.

Near-term forecasts called for temperatures normal or slightly higher. AccuWeather.com predicted that New York City's high of 74 Monday would ease to 68 on Tuesday and fall another degree on Wednesday, its seasonal high. In Pittsburgh, Monday high of 59 should climb to 65 on Tuesday and hit 68 the following day; the normal high in October is 65. Chicago, with a normal high of 67, saw 65 degrees Monday and was expected to see 70 on Tuesday before easing one degree Wednesday.

A seasonal study of natural gas prices between 1990-2012 by United ICAP's Brian LaRose indicated a strong seasonal advance of 107% from Aug. 14 to Nov. 24, followed by a 43% decline to Feb. 4, then a 51% seasonal advance of 51% to May 13, followed by a decline of 35% to Aug. 14.

On Monday, next-day quotes on CIG Mainline rose 12 cents to $3.43, while the Cheyenne Hub gained 11 cents to $3.49. Northwest Pipeline WY gas added a dime to $3.46, and at Opal, gas for Tuesday changed hands at $3.50, up 8 cents. At Kern River, next-day deliveries came in 8 cents higher at $3.49.

Eastern points posted comparable, if not stronger gains. Dominion gas for Tuesday delivery added 9 cents to $3.27, and packages at Tetco M-3 were 14 cents higher to $3.51. Gas on Transco Zone 6 into New York City gained 21 cents to $3.59. Marcellus Shale points led the day's gains. Deliveries to Transco-Leidy jumped 66 cents to $2.18, and gas on Tennessee Zone 4 Marcellus came in 61 cents higher at $2.08.

Futures traders appeared caught off guard. "Even a couple of minutes after 9 [a.m.] we were trading $3.58-3.59, so we were already up 8-9 cents," said a New York floor trader. "I thought with the weather we had last week and the move, that we would be off a little bit so this is a surprise. I'm not sure if we are going to test $3.75 or we are going back down to $3.50 in the next couple of days. My gut feeling is that we test back down to $3.50."

DEVO Capital Management President Mike DeVooght said he doesn't look for the natural gas market to start percolating until the middle of the heating season. "As we approach the heat season, we would not anticipate a tremendous amount of volatility until we get into the middle of the season. As we approach the heat season we should see good support in the low $3 range," he said in a weekend note to clients.

"On a trading basis, we will start to be less aggressive on the short side and start to probe the long side of the market if the spot contract trades into the $3.30-3.40 range." November futures settled Friday at $3.506.

"We also booked profits on our short speculative positions last Monday," he said. "We will hold our short producer hedges. As in crude oil, we are starting to see a more volatile basis market. As we continue to produce more gas in the East, traditionally an end-user market, the basis in those areas has been deteriorating, with some of these markets trading at discounts to the west."

DeVooght advised trading accounts to hold on to a short November position rolled from prior months at $4.35 and risk 25 cents on the trade. End-users should stand aside, and producers and those with exposure to lower prices should continue to hold a short November March strip initiated at $4.50-4.60.

INTL FC Stone Vice President Tom Saal, in his work with Market Profile, sees "horizontal" pricing in the current price zone and said, "buyers be ready." Some buying interest is showing up in the back years: calendars 2014, 2016 and 2018, he added. 

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