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Subdued Futures Can't Keep Pace With Surging Physical Gains

Physical natural gas for Wednesday delivery continued to advance in trading Tuesday, gaining approximately 12 cents on average nationally, with New England points the biggest winners, posting gains upwards of a dollar on some lightly traded pipes.

At the close of futures trading, December had risen 4.3 cents to $3.617 and January gained 4.3 cents as well to $3.666. December crude oil plunged $2.10 to $93.04/bbl.

Only a handful of locations failed to gain, and the East, Great Lakes and major hubs all were solidly in the black. Continued forecasts of cold weather along with stout next-day power prices provided a solid basis for next-day gas purchases by power generators.

Forecasts called for well below normal temperatures to prevail at eastern locations with some nominal warming to follow later in the week. In the meantime, "a cold front will extend from Texas to the coast of Maine, which will provide widespread rain and snow to several regions," said Wunderground.com meteorologist Kari Kiefer. "The southern Plains and the Southeast can expect showers and thunderstorms, while the Mid-Atlantic states and the Northeast can expect snow showers throughout [Tuesday]."

The National Weather Service in Washington, DC said going forward, "A strong area of high pressure will approach the area” Tuesday night “before building overhead Wednesday and Thursday. The high will move off the coast Friday through the weekend and southerly winds will bring milder conditions."

Wunderground.com forecast that Tuesday's high in Boston of 39 would sink to 37 Wednesday before recovering on Thursday at 52; the normal high this time of year is 53. New York City was expected to see a 43 high on Tuesday fall to 39 Wednesday before rising to 48 Thursday, 8 degrees below normal. Washington, DC's 46 high on Tuesday was set to ease to 43 Wednesday and to 52 Thursday. The normal high in Washington for mid November is 59.

Rising next-day peak power prices in the Northeast kept power generators in the black on Tuesday. IntercontinentalExchange said next-day peak power at the New England Power Pool's Massachusetts Hub rose $9.03 to $73.86/MWh, and deliveries to the PJM Interconnect's West Hub gained $2.39 to $49.85/MWh. Next-day power at the New York Independent System Operator's Zone A delivery point in western New York, however, fell $2.50 to $62.58/MWh.

Quotes at the Algonquin Citygates added another 41 cents to Monday's $4-plus gains to average $8.78, and gas at Iroquois Waddington gained 20 cents to $4.39. Tennessee Zone 6 200 L Wednesday deliveries were seen at $8.54, up 32 cents.

Even with $8.00 gas, power generators may be in the black, depending on their generation portfolio. With next-day power at $74, figures indicate a heat rate of just above 8.5 MMBtu/MWhm well above the 7 heat rate characteristic of combined-cycle combustion turbine generators.

In the Northeast, once the domain of petroleum and coal-fired generation, there’s been a big surge to natural gas (see related story). Relatively low natural gas prices and regional environmental initiatives are leading gas-fired generators to provide a greater portion of the electricity in the area, and the region's two regional transmission organizations -- the Independent System Operator of New England (ISO New England) and the New York Independent System Operator (NYISO) -- have seen a dramatic shift away from petroleum- and coal-fired generation since 2001, according to the U.S. Energy Information Administration (EIA).

Other regions saw next-day gas prices firm. Deliveries on Dominion gained a penny to $3.31, and on Tetco M-3, next-day gas was quoted at $3.80, up 12 cents. Gas bound for New York City on Transco Zone 6 rose 29 cents to $4.10.

Great Lakes buyers reported that with cold weather approaching, customers would probably be using more gas than current usage patterns showed. "We bought gas [Tuesday] on Consumers at $3.83, and if I look at the usage over the last week, it should go up from there because it's colder and colder and colder," said a Michigan buyer.

"We went a little heavier than usual on our bid-week purchases, and the way the weather and prices are going it could be a very wise move," he said.

Wednesday deliveries on Alliance rose 3 cents to $3.79 and gas at the Chicago Citygates gained 6 cents to $3.82. On Michcon, Wednesday packages were seen at $3.76, up 4 cents, and Consumers gas changed hands at $3.80, up 5 cents. At Dawn Wednesday gas rose 5 cents to average $3.83.

Other market centers also reported gains. Henry Hub was quoted at $3.69, up 7 cents, while NGPL TX OK Wednesday deliveries rose a penny to $3.60. At Opal, next-day gas was seen at $3.58, up 2 cents, and at the PG&E Citygates, Wednesday parcels rose 4 cents to $3.89.

Analysts see the market focused on weather dynamics rather than temperature levels and storage.

"Although this month is still likely to see fewer HDDs [heating degree days] than is normally the case, the market appears more focused on below normal trends than mild views, a skew that often develops during the anticipatory phase of the heavy usage cycle," said Jim Ritterbusch of Ritterbusch and Associates.

"And, as the dynamic short-term temperature factor overshadows the static element of current supply levels, the large speculative entities are being placed further on the defensive following a huge influx into the short side of the market during the late October-early November period. With net short non-commercial holdings on a F&O [futures and options] basis approaching 160,000 lots, we feel that most money managers are approaching saturation as far as their bearish allocation to this market is concerned."

Addison Armstrong of Tradition Energy said in a note to clients he saw "the onset of below-normal temperatures and increased heating demands across the East continue to provide a spark to the market as it looks to extend its rally into a sixth-consecutive session." However, he said,  "ample storage levels and record production of gas will likely provide resistance to rising gas prices until sustained periods of cold weather and elevated heating demands set in. Weather forecasts, after the next five-days of below-normal temperatures across the East, have shifted slightly colder during the six-to-10 day forecast period, while the 11-15 day forecast period has also shifted slightly colder." 

WSI Corp. in its six- to 10-day forecast showed Tuesday’s forecast trending “colder over the central and southeastern U.S. under a digging cold trough.” Confidence in the forecast “is considered near to slightly above average as a result of good large-scale model agreement and model run-to-run consistency.

WSI noted that temperatures “could run warmer than forecast over the central and eastern U.S. if a digging cold trough is weaker than anticipated.”

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