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Futures Jump to Five-Year High; Midwest Leads Physical Gains

Spot natural gas for Thursday delivery bounded higher in Wednesday's trading as physical market traders elected to follow the path of the highly exuberant futures market. Less than a handful of cash points touched the loss column, and dollar-plus gains were seen at pipes feeding into the Chicago area. New England locations were mostly higher, and most prices in the Mid-Atlantic were up by double digits.

At the close of futures trading, March had rocketed to its highest point in more than five years, peaking on the day at $6.275 before closing at $6.149, up 59.8 cents from Tuesday’s finish. April lagged behind posting an advance of 19.7 cents to $4.950, and March crude oil rose 88 cents to $103.31/bbl, it's highest in four months.

Futures traders were circumspect as to whether natural gas futures would continue advancing. March futures "finished well off their highs and I'm not entirely clear if this is the start of a move to $7.00," said Powerhouse LLC principal Al Levine. "It is now getting on into February and if you think about that, it's hard to imagine the same kind of weather very much longer." Powerhouse is a Washington, DC, trading and risk management firm.

Levine conceded that Elliott Wave analysis suggested prices "might go as high as $6.50, but it doesn't seem as though it is sustainable at those levels. We are not following through with our indicators such as Stochastics, RSI [Relative Strength Indicators], and I think we are running out of steam. My guess is that we are likely to see this thing fall back to $4.60-4.50," by the time the April contract turns spot. "I would be selling into this," he said.

Longer term weather forecasts turned cooler. WSI Corp. of Andover, MA in its 11- to 15-day outlook showed a deep penetrating incursion of below normal temperatures from North Dakota to New Orleans, and Nebraska to New England. The "11-15 day period forecast has trended colder across the CONUS [Continental U.S.] with exception of the Interior West when compared to the previous forecast. Confidence is considered near average standards as models show generally fair large-scale agreement...

"All medium range ensemble models are now indicating a stronger ridge over Alaska up through the North Pole, favoring stronger than anticipated cold northwesterly flow down Western Canada, which should promote colder risks the forecast over the Plains and Midwest late in the period. The southeastern U.S. is under slight warm risks under another brief flex of the southeastern U.S. ridge."

Tim Evans of Citi Futures Perspective put Tuesday's stout 34-cent gain squarely on the shoulders of the weekend weather revision, and further revised his estimate of season ending natural gas storage inventories. "The cooler temperature forecast that emerged over the weekend translat[ed] into a 33.7 cent (6.46%) advance to $5.551/MMBtu. Stronger cash market quotes for the Henry Hub, Louisiana delivery point as well as Chicago Citygate may have also contributed to the push higher," he said.

Evans revised his estimate of the long-term storage deficit. He predicts this week's storage draw at 236 Bcf, but by March 7 he sees the year-on-five-year deficit at a plump 830 Bcf. "If we assume five-year average withdrawals for the balance of March, the withdrawal season will end on March 28 with 983 Bcf left on hand, the lowest level since 2003...

"Similar storage levels are no guarantee of similar price action, but it is worth considering that nearby futures spiked to as much as $11.899 during February 2003 and finished the month at $8.101 before dropping back below the $6.00 mark during March. In this context, the $5.73 peak reached by the March 2014 contract so far doesn't look like such a high price anymore."

Evans recommended holding on to the long March futures position from $4.83 and raising the protective stop to $5.24 "to lock in some profit on the trade."

Next-day physical traders for the most part ignored temperature forecasts. Although an active spring-like mix of rain, thunderstorms, and snow showers was expected to impact the Gulf of Mexico to the Northeast, next-day gas prices posted solid gains. Temperatures were expected to moderate. Wunderground.com predicted that Wednesday's high in Boston of 41 would rise to 46 Thursday and 57 on Friday. The seasonal high is 40. New York City was also expected to enjoy rising temperatures. Wednesday's high of 45 was seen holding for Thursday and then reaching 55 on Friday. The seasonal high is 42.

"A separate cold front will stretch across the southern Plains, the lower Mississippi Valley, the Tennessee Valley and the Ohio Valley [and] a warm, muggy air mass from the Gulf of Mexico will interact with this frontal boundary to produce widespread rain and thunderstorms," said Wunderground.com meteorologist Kari Kiefer. "This system will also bring light snow showers to the Mid-Atlantic and Northeast, while a coastal system may bring heavy snow showers to northeastern New England. The majority of Georgia and Florida will stay clear of wet weather as high pressure builds off of the coast."

Gas for delivery Thursday at the Algonquin Citygates gained 21 cents to $13.83, and packages at Tennessee Zone 6 200 L gained 23 cents to $14.00. Deliveries to Iroquois Waddington rose by 37 cents to $14.63.

Deliveries to Transco Leidy added 58 cents to $4.55, and gas on Dominion gained a penny to $5.23. Parcels on Tetco M-3 Delivery added 20 cents to $5.86, and gas headed for New York City on Transco Zone 6 gained 9 cents to $6.10.

Buyers in the Midwest reported that they were able to make minimal trips to the spot market in spite of recent high-demand days. "We tried to make minimal purchases of spot gas, and only tried to buy Demarcation gas if we could," said a Midwest utility buyer. "If prices got too high we ran our propane and LNG plants. We are going to be quite careful how much LNG we use through March."

Next-day prices at market points in and around Chicago jumped again as delivery capabilities weakened. NGPL said on its website that it is still under a force majeure because of an outage at Compressor Station 309 in Hot Springs County, AR. The company said reduced throughput capacity could be expected until Feb. 26.

"I would think that could be part of the problem [with high Chicago Citygate prices]," the Midwest buyer said. "Northern Natural Gas Ventura follows Chicago Citygates to a degree and if people can't get gas up from the south, they will try to get it in from Ventura and from Canada. That's their backup to bring gas into Chicago."

Quotes on Alliance for Thursday delivery jumped $1.81 to $10.24, and gas at the Chicago Citygates gained $1.31 to $7.89. Deliveries at Northern Natural Ventura changed hands at $9.17, up $1.48 and at Demarcation Thursday parcels were seen at $6.29, up 44 cents. Deliveries on ANR SW rose by 29 cents to $5.65.

Traders Thursday will have one more data point to track the ongoing depletion of natural gas storage. Stocks currently stand at a thin 1,686 Bcf and last year 131 Bcf was withdrawn' the five-year average is for a pull of 133 Bcf. A Reuters poll of 24 industry cognoscenti showed an average 251 Bcf pull with a range of 212 Bcf to 270 Bcf, and analysts at United ICAP are looking for a 260 Bcf withdrawal. Genscape said its S&D model is showing a withdrawal of 232 Bcf while "our storage scrapes-based gross-up model is showing a withdrawal of 278 Bcf."

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