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Cash, Futures Part Ways; August Tumbles 18 Cents

Physical gas for delivery Tuesday moved sharply higher in Monday's trading as the cooling season descended upon the Eastern Seaboard with a vengeance.

Sweltering heat and humidity was forecast for the Northeast and Mid-Atlantic with many points sporting gains of $1 or more. Producing areas were mixed with the Rockies higher, but Gulf locations steady to lower. Winners far outnumbered losers, and overall the physical market was nearly a quarter higher.

Futures elected to take a different path. At the close August had tumbled 18.1 cents to $4.225 and September was lower by 17.6 cents to $4.219. August crude oil skidded 53 cents to $103.53/bbl.

Next-day gas prices in the Mid-Atlantic soared as temperatures Tuesday and Wednesday were expected to be well above seasonal norms. The National Weather Service in Washington, DC, said "high pressure will remain over the Atlantic Ocean through Tuesday...causing hot and humid conditions over the area. A cold front will approach the region Tuesday night...cross the area Wednesday...and stall over southern Virginia Wednesday night into Thursday. High pressure then builds over the northern middle-Atlantic on Friday."

Forecaster Wunderground.com predicted the high in New York City Monday of 91 degrees would increase still further to 94 on Tuesday and slip to 88 by Wednesday. The seasonal high in New York is 84. Philadelphia's Monday high of 91 was seen advancing to 95 Tuesday before easing to 88 Wednesday as well. The normal early July high in Philadelphia is 83. In Washington, DC, Monday's high of 93 was expected to push the century mark Tuesday at 98 before retreating to 90 on Wednesday. The season high in Washington is 89.

Higher next-day power prices also provided a firm tone to stronger eastern spot gas prices. The IntercontinentalExchange reported that peak Tuesday power at the New England ISO's Massachusetts Hub rose $3.59 to $59.81/MWh and next-day peak power at the PJM West terminal added $3.42 to $67.59/MWh.

NE-ISO forecast that peak load Monday of 21,700 MW would rise to 23,700 MW Tuesday before falling to 21,890 MW Wednesday.

Gas bound for New York City on Transco Zone 6 soared $1.51 to $3.87 and deliveries to Tetco M-3 added a stout $1.18 to $3.60.

New England posted some pretty strong gains as well. Gas at the Algonquin Citygates gained $1.02 to $4.13 and deliveries to Iroquois Waddington gained 14 cents to $4.32. Gas on Tennessee Zone 6 200 L rose by 87 cents to $4.09.

In the Marcellus, gas at Tennessee Zone 4 Marcellus rose 73 cents to $2.68 and deliveries to Transco-Leidy jumped 89 cents to $2.96.

Gulf points were steady to lower. Gas for Wednesday delivery on ANR SE fell 4 cents to $4.19 and parcels at the Henry Hub slipped 4 cents to $4.25. Gas on Tennessee 500 L was flat at $4.27 and deliveries to Transco Zone 3 were unchanged at $4.27 as well. On Tetco E LA next-day gas came in at $4.19, down 6 cents.

It was a far different situation in the futures trading arena as traders scrambled to find the next support level from which prices might at least stabilize. Once prices started falling it was like a fat man rolling downhill. "After we cracked $4.296, look out below, there is not too much between here and $4.118," said Drew Wozniak, vice president at United ICAP. "Normally we get some heat on the 4th of July weekend, but not this time. [Hurricane] Arthur sucked out the heat, and much of the consuming region had a beautifully warm weekend."

Arthur may have taken out the heat near term, but looking farther out, forecasters aren't seeing any major heat event to give the market any kind of boost. Commodity Weather Group in its six to 10-day outlook calls for mostly normal temperatures across most of the country although some above-normal temperatures are expected in the Pacific Northwest and portions of Texas.

"The modeling over the holiday weekend bounced around a bit between hotter and cooler solutions, but for the most part, there seems to be more of a trend toward the cooler direction for especially the Midwest to East with some hotter risks at times in the South (especially Texas) and West," said Matt Rogers, president of the firm.

"Analog comparisons to the evolving pattern seem to suggest more shifts toward 2009 (our last developing El Nino summer) for the first time, but the situation is still somewhat noisy. We were very cautious of the hotter trends in Texas given model hot biases there in recent weeks, and our upper 90s to near 100 F in Dallas is cooler than some guidance. The European modeling is cooler than our outlook in the Midwest, especially for the six-10 day, and we increase the cool risk there. The East Coast still looks somewhat bouncy, but heat risks are still very short-lived (just a few days here and there) with offsetting cooler periods again, too."

Risk managers see the market landscape skewed to the bears. "Natural gas settled lower across the board. Gas has been steadily moving lower after failing to push above key resistance ($4.80) earlier this month," said Mike DeVooght, president of Colorado-based DEVO Capital.

"At week's end, we were approaching the bottom side of its recent trading range. Gas has been under pressure the past couple weeks, primarily because of higher than anticipated storage injections and the lack of any significant cooling demand. Many that have become bullish on gas prices have done so because they anticipate ending the summer at historically low storage levels.

"That may very well be the case if we don't have a cool summer, but if we do, we will start to see the deficit continue to tighten, which will take wind out of the short-term bull sails. To have a substantial bull market, we feel we need to see an uptick in demand to offset the steady production increase we are experiencing in the U.S. We could see short-term weather-related spikes, but we still feel selling rallies above $4.50 for producers is an attractive forward selling level," he said in a note to clients.

DeVooght advises trading accounts and end-users to stand aside. Producers and those with exposure to lower prices should hold the balance of a short summer strip at $4.20 to $4.30 as well as the balance of a second short summer strip initiated at $4.50.

The remainder of the summer strip settled at $4.398 Thursday.

Technically, most traders see the market stuck in a broad $4.25 to $4.75 trading range, but going into today's trading bears had the bottom of the range in their crosshairs in spite of Thursday's modest advance. "With our A=C objective from the $4.891 August high [June 16] within striking distance we will be watching intently for any signs of bottoming into the $4.302-4.242 ("a"="c") vicinity," said Brian LaRose, market analyst with United ICAP. "That said, it is very early to be looking for a seasonal cycle low. Expect a further decline to $3.963-3.937-3.871-3.852-3.848 (1.618 "a"="c") into August if $4.302-4.242 can not provide support."

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