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All Physical Points Post Losses, Yet Futures Manage Modest Gains

Gas buyers saw little risk in being caught short of gas Tuesday following the extended Memorial Day weekend and prices fell across the board in Friday's trading.

Every market point followed by NGI dropped into the loss column, with eastern and northeast points posting double-digit declines. Benign weather patterns were in place across the country, but futures managed a modest gain. At the close June had gained 4.6 cents to $4.405 and July had added 4.8 cents also to $4.405. July crude oil gained 61 cents to $104.35/bbl.

Prices in the East and Northeast fell hard as temperatures in many locations were forecast to have a hard time climbing above normal. The National Weather Service in suburban Philadelphia said, "an upper air disturbance will cross the area this evening [Friday]...followed by another one on Saturday. High pressure will build across the area Sunday and Monday. A cold front...associated with low pressure over Canada...will cross the area Tuesday into early Wednesday. More high pressure will follow for later next week."

Wunderground.com predicted that the high in Boston Friday of 58 degrees would warm to 60 on Saturday and 77 by Monday. The normal high in Boston this time of year is 68. New York City's high Friday of 67 was anticipated to rise to all of 71 Saturday before making it to 83 on Monday. The seasonal high in New York this time of year is 73. Philadelphia's 73 high on Friday was expected to ease to 72 Saturday before also reaching 83 on Monday. The normal late-May high in Philadelphia is 70.

At the Algonquin Citygates trading for the extended weekend saw prices plunge 47 cents to $3.09, and on Iroquois Waddington deliveries dropped 31 cents to $3.96. Gas on Tennessee Zone 6 200 L retreated 24 cents to $3.48.

In the Mid-Atlantic, prices also took some double-digit hits. Gas headed for New York City on Transco Zone 6 for the extended weekend fell 25 cents to $2.93, and gas on Tetco M-3 shed 21 cents to $2.96.

Appalachian prices also softened. Deliveries on Columbia Gas TCO shed 9 cents to $4.35, and on Dominion South weekend, Monday and Tuesday gas was seen 20 cents lower at $2.94.

With the proliferation of gas from the Marcellus turning traditional pricing upside down, judging just by extended weekend gas prices the traditional producing region of the Gulf Coast would be the place to send gas. Some Gulf points were well over $1 higher than the East Coast. Gas on ANR SE for the weekend and holiday period shed 8 cents to $4.27, and gas on Columbia Gulf Mainline was down 7 cents to $4.30. Gas at the Henry Hub also slid 9 cents to $4.38, and packages at Transco Zone 3 were 8 cents lower at $4.35. On Tennessee 500 L parcels for the weekend shed 7 cents to $4.35.

The Midcontinent also lost ground, but like the Gulf retained a premium to East Coast locations. Gas on ANR SW was seen 14 cents lower at $4.16, and gas at the NGPL Midcontinent Pool was lower by 10 cents to $4.20. On OGT weekend, Monday and Tuesday gas fell 8 cents to $4.07, and on Panhandle Eastern gas changed hands at $4.05, down 12 cents.

Following Thursday's above-expectation storage build, analysts still see difficulties on a timely rebuild of working gas inventories. "According to EIA [Energy Information Administration], working gas in storage stood at 1,266 Bcf as of last Friday or a net stock increase of 106 Bcf," said Teri Viswanath, director of commodity strategy for natural gas at BNP Paribas. "This compares to last year's injection of 90 Bcf for the same week and indicates that supply/demand balances are currently 2.29 Bcf/d looser than year-ago levels. In the event that the industry can maintain this supply advantage, working gas in storage would rise to 3.419 Tcf by end October."

She's not buying that outcome. "However, we expect that stocks will ultimately fall short of this level as electric power demand growth reduces the surplus supply available for restocking. We note that electric power demand has increased nearly every summer, despite the seasonal variability in the total generation and competing fuel prices. A closer look at the disaggregated monthly generation data reveals the fact that natural gas plants have steadily increased market share over the past several summers. While this trend in dispatch is particularly noteworthy for shoulder periods (April-June and September-October), we also see a marked increase occurring during the peak months (July-August).

"Perhaps the most important contribution to resilient utility summer demand is the structural change in dispatch. Since 2008, 25.5 GWs of coal capacity has been retired. Between now and the end of 2015, this figure will double as units are idled in advance of the implementation of new federal regulations. Many of the units that have, or will be, retired played a critical role in serving either mid-merit or peak load obligations. The removal of these units from the stack has significantly favored the operation of natural gas-fired generators."

With or without changing power dispatch, this has been a tough market to trade with market swings in both directions highlighting the intensity of the bullish and bearish case. Analysts saw that dynamic in play Thursday with the June contract scoring a double-digit loss on an inventory report that was just a few Bcf over industry consensus. "This sizable price reaction to a storage figure barely removed from street ideas underscores a lot of pushing and pulling that has been taking place in this market all month," said Jim Ritterbusch of Ritterbusch and Associates in closing comments Thursday to clients.

"The bears remain adamant in an opinion that production will come to the rescue in this market in the coming months in accelerating enough into record territory to erase the bulk of the current supply deficit. The bulls, on the other hand, still see storage some 43% below five-year average levels and continue to see a market capable of spiking viciously to the upside on first indication of sustainable hot temperatures or even minor supply disruptions."

Overall, Ritterbusch is looking higher. "Rather than attempting to anticipate every 3-4% price swing, we have laid out a trading theme in which prices will eventually rotate higher and possibly approach the $5 mark depending upon early summer weather events," he said. "At the same time, we have advised selectivity in approaching the market strictly on price pullbacks and we have suggested the $4.40-4.45 zone as appealing in this regard.

“We would suggest holding any long positions within the summer portion of the curve while advising stop protection below $4.29 on a close-only basis using the nearby contract as a reference. We don't expect much downside price follow-through [Friday] as existing shorts will likely be more interested in accepting profits ahead of a long weekend rather than adding to bearish holdings."

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