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Physical Gains Go Toe-To-Toe With Firm Screen; June Adds 6 Cents

Physical gas prices overall elected to match the screen stride for stride overall in Monday's trading. Eastern points managed the greatest gains and although temperature forecasts gave little incentive to purchase gas, when adjusted for humidity major metropolitan areas were expected to be well over 80. Northeast, Marcellus, and Mid-Atlantic locations all posted healthy double digit gains.

Most locations were higher by a nickel to a dime, and the few points that did manage to slide into the loss column were down not much more than a nickel. At the close of futures trading June had advanced 5.7 cents to $4.470 and July was up 5.2 cents to $4.473. June crude oil rose by 59 cents to $102.61.

At first glance weather didn't seem to offer much in the way of a buying incentive, but a closer look showed that temperatures adjusted for humidity were expected over 80 Tuesday at major eastern receipt points. AccuWeather.com reported that the high in New York City of 70 Monday would rise to 76 by Tuesday but the humidity-adjusted Tuesday high was expected to reach 81. The normal high in New York in mid-May is 72. Philadelphia's Monday high of 73 was anticipated to reach 78 Tuesday and Wednesday, but the heat index was expected to reach a less comfortable 80 on both days. The normal high in Philadelphia is 74.

"The welcome stretch of dry weather around Washington, D.C., will only hold through Tuesday," said Kristina Pydynowski, AccuWeather.com meteorologist. "An area of high pressure will allow dry weather to dominate through Tuesday as temperatures gradually rebound. [but] warmer and more humid air will pour in on Wednesday, setting the stage for a storm system to ignite another round of showers and thunderstorms. The afternoon will likely be more active than the morning and some of the thunderstorms will turn heavy and gusty"

"The storm will open the door for more comfortable air to arrive late in the week and for the start of the Memorial Day holiday weekend. While temperatures will quickly trend upward for Memorial Day, it will likely not be hot and humid for the unofficial start to summer," she said.

Quotes for gas headed to New York City on Transco Zone 6 jumped 21 cents to $3.19 and gas on Tetco M-3 rose 17 cents to $3.19.

Marcellus points were also firm. Deliveries on Tennessee Zone 4 Marcellus added 25 cents to $2.29 and deliveries to Transco Leidy rose by 13 cents to $2.19.

Northeast points had the day's greatest gains. Gas into the Algonquin Citygates rose a stout 29 cents to $3.68 and deliveries to Iroquois Waddington fell 5 cents to $4.41. Packages on Tennessee Zone 64 200 L jumped 34 cents to $3.74.

In its 20-day forecast WeatherBELL Analytics sees an incursion of warmth over the Great Lakes. "[T]he push of warmth the GFS [Global Forecast System] had for this period (from much of last week) for the big CDD [cooling degree days] areas in the Midwest and East is not much," said meteorologist Joe Bastardi. "The real fun and games is in the 10-15 Day. I think what is happening is that part of the energy in the Southwest that comes across splits toward the Caribbean where a tropical system may try to develop. The other part moseys under the ridge over the East. This sets up a warm pattern for 5 days from the northern Plains toward the Great Lakes, while the western part of Canada is cooling. I have very low confidence in the idea that it's just easy-peasy farther east."

Analyst Eugene McGillian of Tradition Energy sees the market "settl[ing] into sideways consolidating trading just below $4.50 as the market balances moderating weather forecasts, record production levels of gas, and the remaining weeks of shoulder season against severely depleted storage levels that are at an eight-year low and more than 950 Bcf below the five-year average.  Weather forecasts are little changed to open the week with normal temperatures expected across the East in the next five days followed by a shift warmer to above-normal temperatures in the latter part of this month and the early part of June," he said in a morning report to clients.

Stephen Smith of Stephen Smith Energy Associates notes that "The current week, ending May-16, is likely to be the third week in a projected long-series of shrinking weekly storage deficits. The next 4-5 weeks typically represent the trough for total degree-days. This condition, combined with a relatively high current gas-to-coal price ratio, should lead to a sequence of storage sizeable deficit contractions, a process which normally eases only when significant summer heat arrives."

He added that "The current price spread vs. the year-ago price of $3.89/MMBtu [Henry Hub] is only $0.54/MMBtu. This strikes us as quite small given that we still have a year-over-year deficit in excess of 800 Bcf. US production for last week jumped about 1% from the week before. We used some of this increase as a 'higher base' from which to start our estimated summer production trajectory, and this led to a currently-projected peak November storage level of about 3,450 Bcf, up about 90 Bcf from last week's projection."

Risk managers continue to stay the course with short hedges. "Production remains strong; demand is relatively flat and mild temperatures throughout the majority of the U.S. do not support higher gas prices," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

"However, rig counts and storage levels are well below last year's levels and the gas market continues to show signs of strength. Fundamentally, the natural gas market is becoming healthier. On a trading basis, we feel selling the summer above $4.50 for producers is an attractive selling level. It could be that in the future the mid to high 3's will be the new floor on the breaks. We will continue to hold our current short positions for hedges."

DeVooght suggests that trading accounts hold on to earlier shorts established when April was trading at $5.00 to $5.10, and end-users should stand aside. Those with exposure to lower prices should continue to hold short the balance of a May-October strip from $4.20 to $4.30 and also hold short a summer strip from $4.50. The summer strip settled at $4.407 Friday, according to DeVooght.

Forecasters are seeing warmer temperatures in their near-term forecasts. WSI Corp. in its morning six- to 10-day outlook shows progressively rising temperatures. "[Monday's] forecast has trended warmer over the northeastern two-thirds and cooler over the Northwest when compared to Friday's forecast. Forecast confidence is considered just above average standards as models show fair agreement but with technical differences."

The risks to the forecast are "over CAISO under another building subtropical warm ridge. Slight warmer risks are in place over MISO [Midwest Independent System Operator] early, followed by much of PJM later in the period if the latest GFS [Global Forecast System] model solution is correct with the placement of a progressive warm ridge."

In its Early View storage survey, Energy Metro Desk calculated a build of 105 Bcf for the week ended May 16. Last year and the five-year average stand at 90 Bcf.

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