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NatGas Cash Prices Retreat; Futures Inch Higher Despite Another Triple-Digit Build on Tap

After a couple days of strong advances, the streak came to an end on Wednesday as values for physical natural gas for Thursday delivery slumped nearly across the board, from a few pennies to a nickel in most regions, to as much as 20-plus cents at a handful of Northeast locations. One standout in the black was Algonquin Citygates, which has been especially volatile recently due to ongoing capacity constraints.

Traders in the natural gas futures arena apparently didn't get the negative message that much of the physical market had been giving off Wednesday as July futures posted a 1.1-cent gain over Tuesday's regular session close to finish at $4.640.

On the weather front, the National Weather Service's six- to 10-day forecast Wednesday was a mixed bag. For June 10-14, all East Coast states were expected to experience above normal temperatures along with the Southwest down through Central Texas, while the rest of the nation was forecast to see normal to below-normal temperatures for this time of year.

Price drops in California were on par with much of the country following a string of higher averages. PG&E Citygate was down 4 cents to average $5.17, while SoCal Citygate came in 6 cents lower than Tuesday at $5.07 and the SoCal Border Average also decreased by 6 cents to  $4.78.

The larger drops were in the Northeast outside of the Algonquin Citygates, where gas into New York City on Transco Zone 6 slid 23 cents to average $3.44. The transportation bottleneck out of the prolific Marcellus Shale production region was also evident Wednesday, as Transco Zone 4-Marcellus dropped 30 cents to average $1.95 and Transco Leidy-Line slid 20 cents to $2.10.

Solidly in the black Wednesday was the Algonquin Citygates, which jumped $1.32 for Thursday delivery to average $5.26 as capacity constraints continued to plague the system.

For gas day June 5, Algonquin Gas Transmission scheduled and sealed nominations sourced from points west of its Cromwell Compressor Station for delivery to points east of Cromwell. The pipeline also restricted and sealed nominations sourced at the Tennessee Gas Pipeline interconnect at Mendon.

The current state of the United States' natural gas storage situation and the question of whether the severely depleted inventories can be restocked by the 2014-2015 winter heating season, remains a front-burner topic among natural gas traders and analysts.

In crunching the Energy Information Administration's (EIA) storage history, NGI Markets analyst Nathan Harrison offers up three different scenarios for how this year's injection season will play out. The "base case" scenario shows storage levels for each week based on the average of injections or withdrawals for that week over the past five years. In this scenario storage levels do not significantly approach the five-year average during 2014, but instead come in 24% short of the average on October 31st at 2,926 Bcf. The "high case" scenario shows storage levels under the assumption that the highest historical injections and lowest withdrawals that occurred for each respective week over the past five year whereas the "low case" assumes the lowest injections and the highest withdrawals taking place (see related story).

"Even in the high case, storage levels do not meet up with the five-year average until mid-December," Harrison said. "Given that even in the rosiest of these possible scenarios storage levels do not reach the five-year average by end of summer, the market could well be cutting it close."

In the Natural Gas Supply Association's 2014 Summer Outlook for Natural Gas released Wednesday, the organization said gas production will set records this summer, but so much of it will be needed to bring storage to adequate levels before the 2014-2015 winter heating season that the net result will be soft upward pressure on prices compared with last summer (see related story). Those higher prices could drive more electric power demand to coal which would help make up for a shortfall in gas storage.

Looking more near term, analysts and traders were expecting yet another triple-digit storage build when the EIA makes its report Thursday morning for the week ending May 30. A Reuters survey of 24 industry insider produced a range of build expectations spanning from 107 Bcf to 125 Bcf, with a consensus estimate of a 116 Bcf addition. The number revealed Thursday will compare to last year's date-adjusted 108 Bcf injection and the five-year average build for the week of 93 Bcf.

Citi Futures Perspective analyst Tim Evans said he believes 122 Bcf was injected during the week, adding that he still "anticipates above-average storage injections at least through the June 20 horizon of the current 11-15 day forecast."

Analysts saw Tuesday's and Wednesday's modest gains in July futures as rather generic. Evans said he thought traders were expecting summer air-conditioning demand and the occasional tropical storm running past production platforms in the Gulf of Mexico as reason enough to buy.

"While some of the recent day-to-day changes in natural gas fundamentals have helped support market sentiment, with one more named storm in the Atlantic hurricane forecast here and a somewhat warmer temperature outlook there, the larger fundamental trends remain bearish in our view.

"For example, the updated Colorado State University forecast for 10 named storms is still below both the 12 storm average and the 14 storm tally from a year ago. And with only 4% of US natural gas supply coming from the Gulf of Mexico, we note it is increasingly possible for storms to have a larger impact to onshore natural gas consumption than it has for offshore production. In similar fashion, forecasts for a warmer than normal June-August may still be noticeabley cooler than the five-year average," Evans suggested.

Evans also expects to see "ongoing robust storage injections as likely." He figures on a 122 Bcf build in Thursday's report, ahead of consensus estimates closer to 115 Bcf.

Little change was reported in a system of showers and thunderstorms over the Gulf of Campeche. The National Weather Service (NWS) in its Wednesday afternoon report said upper level winds were likely to inhibit development and the most likely path would result in heavy rains over southeast Mexico. NWS said the likelihood of formation into a tropical system was 20% over the next 48 hours and 20% over the next 5 days.

In a morning report NOAA said it expected a light Atlantic hurricane season as well with a probability of 70% of 8-13 named storms. 3-6 were expected to reach hurricane strength and 1-2 were expected to reach major hurricane status. Over the last 10 years the Atlantic has averaged 16.3 named storms, 7.7 hurricanes and 3.2 major hurricanes, NOAA said.

In the physical markets industry consultant Genscape reported that productions trends will prompt California to have to compete for supply. "Current gas market balance is suggesting that North American gas production will continue to grow, but the geography of production, may not benefit California. The competition for California to compete with other regions will likely intensify."

It noted that "Gas demand within California will continue to grow. The growing demand will test the inbound pipeline capacity." Genscape said declining production from the San Juan Basin, steady Rockies and Canadian production along with increased flows out of the Permian will increase the competition California faces.

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