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Steady Physical Market Outshines Soft Futures; July Slides A Nickel

Next-day gas for Thursday delivery changed little overall in trading Wednesday, but far more points were in the black than in the red.

Outsize declines in New England and the Mid-Atlantic prompted by a weak power sector, however, were able to offset broad gains of a few pennies to a nickel or more at most market points. Great Lakes locations firmed, and Appalachian points were mixed. At the close of futures trading, July had skidded 5.0 cents to $4.659 and August was off 4.7 cents to $4.675. July crude oil shed 39 cents to $105.97/bbl.

In the Mid-Atlantic, temperatures Thursday were set to ease from record levels. "In the wake of the hottest weather of the year so far, more seasonable temperatures will return to Washington, DC, late this week, but showers and thunderstorms are in the offing," said AccuWeather.com meteorologist Alex Sosnowski.

"The extreme heat from Tuesday and Wednesday will break on Thursday in the form of thunderstorms [and] enough dry air may push in from the north and east on Friday to keep rain away and allow some sunshine.

"Temperatures during the middle of June tend to range from a low in the upper 60s F to a high in the middle 80s, [but] the temperature on Tuesday not only set a high mark for the year so far, but also set a new daily record high by reaching 97 F, breaking the old record of 95 F."

He added that "a zone of clouds, showers and thunderstorms will stretch from the Upper Midwest to the Ohio Valley and lower mid-Atlantic Saturday and Sunday [and] high temperatures will be within a few degrees of 80 this weekend. Which side of 80 will depend on sunshine versus showers."

According to AccuWeather.com, the high Wednesday in Washington, DC, of 96 will drop to 91 Thursday and 86 Friday. The normal high for the nation's capital is 85. New York's 88 high Wednesday was forecast to ease to 80 Thursday and inch back up to 82 Friday. The seasonal high in New York is 80. Boston's 88 maximum Wednesday was seen falling to 82 Thursday and falling further to 78 on Friday. The typical mid-June high in Boston is 77.

IntercontinentalExchange reported that Thursday peak power at NEPOOL dropped $17.65 to $49.81/MWh and next-day peak power at PJM plummeted $51.08 to $61.94/MWh.

The New England Independent System Operator forecast that peak load Wednesday of 21,040 MW would drop to 18,940 MW Thursday and 16,570 MW Friday.

Quotes for Thursday gas deliveries at the Algonquin Citygates fell $1.54 to $5.64, and gas into Iroquois Waddington shed 15 cents to $5.07. Packages on Tennessee Zone 6 200 L fell 41 cents to $5.14.

Gas bound for New York City on Transco Zone 6 skidded 38 cents to $3.56, and parcels into Tetco M-3 dropped 32 cents to $3.49.

Appalachian points were mixed. Gas on Columbia TCO added 2 cents to $4.67, but deliveries to Dominion South shed 21 cents to $3.35.

Great Lakes marketers reported stepping up to the plate to pay nearly $5 for next-day gas. "We paid $4.965 for Thursday gas on Consumers," said a Michigan trader. "We are looking at customers' storage, seeing what they need, and dividing it by five months  We have some customers that are down 60% from last year. We are watching what forecasters are saying about El Nino."

El Nino can also have a significant impact on the Atlantic hurricane season. "We continue to foresee a below-average 2014 Atlantic hurricane season," said CSU forecasters Philip Klotzbach and William Gray earlier in the month. "The tropical Atlantic remains slightly cooler than normal, while El Nino is in the process of developing. However, the transition to El Nino has slowed some in recent weeks, and the tropical Atlantic has anomalously warmed, causing us to increase our forecast slightly." (See Daily GPIJune 3).

Gas for Thursday delivery at the Joliet Hub rose by 2 cents to $4.87, and gas on Alliance added a penny to $4.87. At the Chicago Citygates, Thursday parcels came in at $4.83, up a penny, and on Consumers gas was seen 2 cents higher at $4.97. On Michcon Thursday gas changed hands at $4.96, up 3 cents.

Traders will be taking a close look at Thursday's storage report for signs of just what impact recent elevated temperatures have had on the rate of storage builds. Last year, 92 Bcf was injected, and the five-year average is for 87 Bcf. Credit Suisse is expecting an increase of 109 Bcf, and IAF Advisors calculates a 108 Bcf injection. A Reuters poll of 22 traders and analysts revealed an estimated 110 Bcf average with a range of 101 Bcf to 115 Bcf.

"The consensus view is still coming into focus, but estimates we've seen so far suggest expectations are centering somewhere in the 107-110 Bcf range, a bit below our model's 112 Bcf forecast but still bearish compared to the 87 Bcf five-year average for the week ended June 13," said Tim Evans of Citi Futures Perspective."

Evans sees warmer temperatures "adding in some air conditioning demand that will limit storage injections in the next two weeks. While not as bearish as the prior scenario, our storage forecast still features a declining storage deficit. This confirms that supplies are becoming easier on a seasonally adjusted basis, which is most often bearish for prices over the intermediate term.

"We can't rule out a rally attempt like the one last week on the basis that storage levels are still not making enough progress in returning to more comfortable levels, but even this argument should be losing traction as the deficit shrinks."

PJM power generators can look for a combination of heat and humidity along with thunderstorm activity in the near term. WSI Corp., in its Wednesday morning outlook, said to expect "hot and humid conditions in combination with a cold front lead[ing] to the increasing chance and coverage of scattered shower and thunderstorm activity during the next couple of days. Severe weather is possible. This front will wash out and interact with another disturbance during the end of the week into the weekend, which will continue to support the chance of scattered showers and storms. The combination of this front and unsettled wet weather should scale back the scope of the heat and humidity.

"Highs [Wednesday] may generally range in the upper 80s and 90s. Dewpoints in the 60s may allow for heat indices well into the 90s to near 100 in spots. A cold front and its associated wet weather should act to scale back the magnitude and scope of this heat and humidity during the end of the week into the weekend. Highs may generally retreat into the 80s to low 90s."

Variable wind generation is forecast. "A warm south-southwest wind should continue to promote elevated wind generation [Wednesday] into tonight. Output may range near 2 GW at times, [but] wind generation is expected to relax and become more variable during the end of the week into the weekend. The recent and expected wet weather will support increasing stream flow and favorable hydro generation potential. Variable cloud cover may gradually scale back solar generation prospects during the next few days."

Tom Saal, vice president at INTL FC Stone in Miami, in his work with Market Profile said to look for the market to test Tuesday's value area at $4.718 to $4.694. He noted that the week's initial balance runs from $4.778 to $4.669 and Market Profile methodology calls for traders to buy or sell as prices break out of the initial balance. Should futures break higher than $4.778, Saal places trading targets at $4.833 and $4.887. A fall below $4.669 would place $4.615 and $4.560 in the trading cross-hairs. Mode Market Profile support comes in at $4.612.

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