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East Weakness Offsets Broader Strength; Analysts See Case for Higher Winter Prices

Physical natural gas prices for weekend and Monday delivery added a penny on average Friday. Prices generally moved within a nickel of unchanged at most points, but Northeast and Eastern seaboard locations found themselves mostly in the loss column.

At the close of futures trading, November had added 7.8 cents to $3.707 and December had gained 6.9 cents to $3.812. December crude oil gained 74 cents to $97.85/bbl.

Weekend temperatures at eastern locations were expected to hover close to seasonal norms. According to AccuWeather.com, Friday's high in Boston of 51 was expected to rise to 58 Saturday before receding to 55 Monday. The normal high in Boston this time of year is 58. Hartford, CT's Friday high of 52 was seen advancing to 55 Saturday before making it to 56 Monday. The normal high in Hartford is 59. New Haven, CT, was expected to see a high Friday of 55 before a rise to 56 on Saturday. By Monday the high was predicted to reach 57. The normal high in New Haven for late October is 60.

Forecasters predicted a sunny but cool weekend for New York. "While chilly air and a biting breeze linger in the East, sunshine will nudge temperatures a little by day this weekend around New York City," said Alex Sosnowski, AccuWeather.com meteorologist. Highs this weekend will be in the middle to upper 50s [and] nighttime lows will be in the mid-30s over the northern and western suburbs and the 40s in Midtown.

"No major storms will affect the region through early next week. However, depending on the track of one or more storms to affect the Rockies, the weather has the potential to get unsettled in the Appalachians and East Coast sometime late next week."

Monday power prices throughout the region offered little incentive to buy gas for power generation. IntercontinentalExchange reported that power for Monday delivery to the New England Power Pool's Massachusetts Hub added 46 cents to $42.29/MWh, but other New England spots showed declines. Power into the New York Independent System Operator's Zone A delivery point (western New York) fell $1.84 to $41.16/MWh, and power into Zone G (Eastern New York) slipped $1.16 to $42.98/MWh.

Gas for weekend and Monday delivery at the Algonquin Citygates plunged 31 cents to $4.19, and gas into Iroquois Waddington shed a nickel to $4.04. Gas on Tennessee Zone 6 200 L lost 16 cents to $4.23.

On Dominion, gas for weekend and Monday delivery fell 6 cents to $3.50, and packages on Tetco M-3 were off 6 cents as well to $3.71. Gas bound for New York City on Transco Zone 6 was flat at $3.84.

Major market trading centers were solidly in the black. Gas at the Chicago Citygates rose 2 cents to $3.91, and deliveries to the Henry Hub were up 2 cents to $3.67. Gas at Opal rose 2 cents to $3.68 as well, and packages at PG&E Citygates gained 5 cents to $3.99.

Traders see a case for higher winter prices. "There's been a lot of talk about the diminishing summer-winter time spreads," said a Chicago-based analyst. "When you look at where the past summer strip [April-October] settled and where the upcoming winter strip [November-March] is trading there is just not a lot of spread there.

"What I like to do is look back historically and see where the actual summer months settled out. Maybe there wasn't a spread going into the winter, but did winter prices ultimately rise? There is an outlier where winter prices settled about $4 below the summer on the heels of a very mild winter, but if you take that out of the mix, for six out of the last seven years winter prices have averaged about 46 cents above their preceding summer strip average. November-March over April-October.

"This past summer strip averaged about $3.79, so if you project that and ask whether there is any likelihood that average holding true, it would argue that the upcoming winter could average in the $4.20s. It certainly isn't trading that high now. It's only $3.83 at Friday's settlement. That suggests that there may be some room for winter prices to move higher," the analyst said.

Forecasters are seeing any widespread cold limited to the western US. Commodity Weather Group in its morning 11- to 15-day outlook shows a broad fairway of below-normal temperatures from Arizona and New Mexico expanding to Montana and Wisconsin. The remainder of the country, however, is shown as normal.

"[W]e are seeing the models become less and less enthusiastic about intensities for upcoming cool pushes," said Matt Rogers, president of the firm. "So the six-10 day has modified to near normal for many areas now partly due to warmer forecast changes and partly to progression of [Thursday’s] outlook as the coolest weather clumps into the one-five day. Despite the warming trends, the modeling still seems to resist developing any sort of major warming. While weakening, the Alaskan ridge does not flip around to a warm-inducing Alaska low. So instead, we just get a mixed pattern with transient, weak warming and cooling events. Risks lean warmer due to the lack of a big cold air connection."

Rather than looking at averages, Jim Ritterbusch of Ritterbusch and Associates sees a cold snap necessary if prices are going to rise. "[F]rom here, some renewed cold temperatures will likely be required to lift this market back to above this week's highs. Imbedded within [Thursday's] larger than expected supply increase was an uplift in production that we are still viewing as a significant bearish market consideration as this 4th quarter proceeds."

"Nonetheless, with supply stretched from average levels by only around 2%, any shift back toward a significant or sustainable cold spell next month will still be able to boost values by as much as 7-8% from current levels. So, while our upside price parameter of $4.05 may appear a bit out of reach, it is still achievable some 2-3 weeks down the road should temps cool down again.

Ritterbusch is looking for a place to buy. He feels that "max downside potential exists only to about the $3.60 level as we focus on the December futures contract that will acquire prompt status next Wednesday. We have been advising a $3.60-4.05 trading range in stretching a view out over the next month. But, at the same time, we feel that the low side of these parameters is highly likely to be tested first. We will be looking to approach the long side of December around the $3.60 area."

Tom Saal, vice president at INTL FC Stone says now may be the time to strike for those with exposure to higher prices. "Hedgers with short side risk: look to buy now for the winter months. [The] trend ain't your friend." He also sees buying interest in Cal'14, Cal'16 and Cal'18.

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