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Physical Gas, Futures Glide Lower; July Off by Double Digits

Natural gas for delivery Wednesday suffered a broad decline across most points Tuesday. Losses were generally from a nickel to a dime, and the overall decline was about 3 cents.

California prices were off about 8 cents along with moderate weather conditions and a soft power market, but the Mid-Atlantic and Marcellus were also soft. A notable exception were the constraint-derived triple-digit gains seen at New England locations. At the close of futures trading, July had fallen 11.5 cents to $4.530 and August was off by 11.2 cents to $4.523. July crude oil declined 6 cents to $104.35/bbl.

New England points posted triple-digit gains as transportation issues limited supply. Algonquin Pipeline said it was restricting both firm and interruptible flow of shippers on western portions of the line. "Due to the previously posted maintenance required on its 30-inch line between the Stony Point and Cromwell compressor stations, AGT [Algonquin Gas Transmission] has restricted interruptible, secondary out of path nominations that exceed entitlements, secondary out of path nominations within entitlements, secondary in path and approximately 31% of primary firm nominations sourced from points west of its Southeast Compressor Station (Southeast) for delivery to points east of Southeast. No increases in nominations sourced from points west of Southeast for delivery to points east of Southeast, except for Primary Firm No-Notice nominations, will be accepted."

Prices surged for gas into New England. Next-day gas at the Algonquin Citygates jumped $1.43 to $5.22, and deliveries to Tennessee Zone 6 200 L rose by $1.05 to $4.86. Gas at Iroquois Waddington added 8 cents to $4.77.

Other eastern points were lower. Deliveries into New York City on Transco Zone 6 fell a penny to $3.40, and deiveries on Tetco M-3 lost 3 cents to $3.37.

Marcellus gas also retreated. Gas on Transco Leidy was off 10 cents to $2.65, and on Tennessee Zone 4 Marcellus next-day deliveries changed hands 5 cents lower at $2.54.

The basis markets tell a somewhat different market story as winter basis at eastern points is strong and keeps getting stronger. "The Algonquin winter basis is over $10 and continues to get firmer every day," said an industry veteran.

NGI's Forward Lookfor Tuesday, June 10 pegs the current basis on the Algonquin Citygate winter strip at $10.296. "Compared to Monday, the Algonquin basis didn't really move -- only adding two-tenths of a cent. However, the basis has risen $1.022 since the beginning of May, when it came in at $9.274 for the May 1 Forward Look," said NGI Markets Analyst Nathan Harrison.

For more information on the brand new NGI’s Forward Look, contact Dexter Steis at 1-800 427-5747.

The industry veteran added, "Demand for gas is going to be there, and I think it is being built into the numbers. People are going to say, 'I cannot afford to not have the gas, and I am willing to pay at least $10 in the New England area every single day of the winter [November-March].' That's $10 plus the Nymex number for the entire winter.

"We are already talking $15 for the entire winter. That tells you there is not enough gas in storage and there is not enough back up. There hasn't been a change in the infrastructure up there at all, and if you take away the coal-fired plants, you have more natural gas demand. Transco Zone 6 winter basis is over $4, and that's pretty high, especially when the summer months are trading minus 95 cents. Winter 2015-2016 Transco Zone 6 is $3.05.

"The markets don't believe there is enough storage to cover demand, and they don't believe there is enough infrastructure to get enough gas to cover the demand. The pipeline infrastructure isn't there yet," he said.

California points were lower as power demand and prices weakened. IntercontinentalExchange reported next-day peak power at NP-15 fell $5.69 to $50.25/MWh and Wednesday peak power at SP-15 was down $2.63 to $51.01/MWh.

The California Independent System Operator reported that peak Tuesday power load was projected at 36,470 MW, but peak load Wednesday was seen at only 32,922 MW.

Weather conditions were seen as normal. The National Weather Service in Los Angeles said, "A small low will cross the region on Wednesday and deepen the marine layer. A large low system will arrive Friday to increase the night to morning clouds from the beaches to the coastal valleys into next week. Breezy winds and fair skies will occur in the mountains and deserts into Friday. The nightly temperatures will be a little above normal into early next week...with the afternoon temperatures about normal."

Deliveries to Malin were off by 6 cents to $4.57, and gas at the PG&E Citygates fell 9 cents to $5.15. At the SoCal Citygates, next-day packages slipped 9 cents to $5.01, and at the SoCal Border Wednesday volumes fell 9 cents also to $4.77. Gas on El Paso S Mainline skidded 11 cents to $4.85.

Futures traders saw nothing unusual in the 11-cent drop. "We're still stuck in the range from $4.25 to $4.75, so nothing has really changed," said a New York floor trader. "Now we are just stuck a little closer to the middle."

Longer-term forecasts look for a cool middle of the country. Joe Bastardi of WeatherBELL Analytics in a monthly forecast said he is "confident that large-scale normal to below normal still rules the roost. Much of the nation between the Rockies and Appalachians will be cooler than normal [and] the coming El Nino is over-hyped."

He added that it still continues, "but as I have stated many times, it is over-hyped. The water temperatures in the Pacific continue to have no linkage to the SOI [Southern Oscillation Index]. A look at the forecasted pressures in the Pacific for the next 10-15 days indicates there is no likely turn to a negative SOI on the way. Only the 1976 El Nino had the months of April, May and June with positive SOIs."

Bastardi is having difficulty drawing comparisons. "At this time, there is very little linkage to any of the events we have seen for the past 30 years. The western tropical Pacific and Indian Ocean are quite warm, and there is little support for the warm water in the Pacific doing anything but running its course and then falling apart. There has been a recent downturn in the dailies, but looking at forecasted pressures, there may be yet another positive burst in the making. Because of the El Nino situation, we are flying blind with analogs. Along with 1976, I took the last two warm ENSO events (2002 and 2009) that followed strongly cold MEI [Multivariate ENSO Index, comprised of six Tropical Pacific variables] events. This gives us a July analog that is almost opposite of what I have."

If warm spells ever come, the price reaction is likely to be exaggerated, according to Jim Ritterbusch of Ritterbusch and Associates. He said in a weekly report that last week's price strength "appeared to develop amidst only minor adjustments in the short-term temperature views, and we feel that any significant hot spells that could begin to show up in the forecasts will receive an exaggerated price response. And without knowing where average street guesstimates for this week's storage report will fall, we feel that odds will be favoring an upside price response to this week's EIA data.

"We feel that a drop back to around the 100-105 Bcf injection area is likely. While such a number would again exceed five-year average builds by around 12-17 Bcf, the contraction in the supply deficit would be about half that seen in last Thursday's release. Furthermore, the deficit against last year is unlikely to change appreciably. Stated differently, overall balances won't be altered appreciably by this week's data, and the market will still be focused on a shortfall against average levels of around 900 Bcf or almost 40%.

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