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Northeast, East Gains Outdo Broader Declines; Futures Dive

Spot gas for Tuesday delivery was mixed in Monday's trading with Northeast and East points posting hefty gains, driven by expected heat and higher power requirements, while at the same time producing regions fell into the loss column.

At the end of the day, the gainers overtook the losers and the overall market was higher by a dime. Futures trading took an entirely different turn, with weather forecasts moderating and sending futures into a tailspin. At the close, August was down 10.2 cents to $3.849 and September had fallen 9.3 cents to $3.862. August crude oil rose by $1.46 to $104.59/bbl.

In the Northeast, power loads were forecast to show stout increases. At ISO New England, Monday's peak load of 19,300 MW was predicted to rise to 21,810 MW Tuesday and 23,340MW Wednesday. At the New York Independent System Operator, Monday's peak demand of 23,990 MW was expected to reach 26,165 MW Tuesday and 27,852 MW Wednesday.

Next-day peak power prices also surged. IntercontinentalExchange reported that Tuesday peak power at ISO New England's Massachusetts Hub rose by $11.53 to $47.73/MWh and at the PJM West terminal Tuesday peak power added $8.96 to $54.41/MWh.

According to Kristina Pydynowski, AccuWeather.com meteorologist, "Very warm and humid air will surge back across the mid-Atlantic and Northeast for the first part of the week, but the sticky air's presence will not last long. As high pressure moves off the Atlantic Coast, the door will open for the steamy air to spread over the rest of the Northeast Tuesday through Wednesday. It is not just an increase in humidity headed to the Northeast and mid-Atlantic but also soaring temperatures.

"Wednesday is shaping up to be the hottest day of the new week with temperatures reaching or cracking the 90 degree mark in Washington, DC, Baltimore, Philadelphia and Newark, NJ. Albany and Syracuse, NY; Hartford, CT; Boston; Concord, NH; and Burlington, VT, will also heat up to around 90 F.”

When adjusted for humidity, "temperatures will surge well into the 90s in many urban areas in the I-95 zone on Wednesday afternoon. In parts of Virginia, Maryland, Delaware and interior New Jersey, [humidity-adjusted] temperatures may approach 100 degrees for a time,” Pydynowski said.

Quotes at the Algonquin Citygates rose 72 cents to $3.26, and deliveries to Iroquois Waddington added 34 cents to $3.87. Gas on Tennessee Zone 6 200 L added 47 cents to $3.24.

To the south, next-day prices in the Mid-Atlantic added a half dollar. Gas bound for New York City on Transco Zone 6 gained 59 cents to $3.03, and gas on Tetco M-3 rose 54 cents to $2.93.

On Dominion South, Tuesday parcels were seen at $2.70, up 43 cents, and on Millennium, Tuesday gas rose by 45 cents as well to $2.78.

Producing regions for the most part saw declines. Tuesday gas on Columbia Gulf Mainline fell 6 cents to $3.77, and deliveries to the Henry Hub shed 7 cents, also to $3.84. Tennessee 500 L next-day parcels came in at $3.82, down 4 cents, and on Transco Zone 3 Tuesday gas changed hands at $3.83, down 4 cents.

Overnight weather forecasts moderated and knocked the spots off the futures market. WSI Corp. in its Monday morning outlook said, "[Monday's] six-10 day forecast has trended cooler over the Midwest and parts of the Deep South while running warmer over California and the Great Basin. Confidence in today's forecast is near to above average with models exhibiting good large-scale agreement and consistency. An amplified, stable pattern dominates this period.

"Deep, persistent troughing promotes a cooler risk through the east-central states, more specifically through the heart of the Midwest. A slight warmer risk remains in play over the interior West. A warmer risk is noted on individual days along the East Coast where a southerly flow is likely to evolve ahead of cold fronts dropping into the Midwest states."

The forecasts clearly caught the eye of analysts, and futures opened floor trading already down 8 cents. "The overnight weather models reflect net cooler changes overall. The heat in the Northwest and Midwest early this week appears to have weakened, with next week's outlook turning cooler east of the Rockies. The more expansive below-normal temperatures unfolding across the eastern half of the US this week suggests a slight week-on-week build in inventories," said Teri Viswanath, director of commodity strategy for natural gas at BNP Paribas.

"The most recent CFTC report for the week ending July 15th reflected the continued unwinding of non-commercial positions as disappointing fundamentals discourage investment. According to our analysis, net-long wagers on Henry Hub futures have dropped to their lowest level since mid-December as the cumulative effect of two months of outsized injections has markedly eased inventory concerns."

Monday's 10-cent futures drop may be a hint of things to come. Longer-term forecasts call for mild conditions enabling storage injections well beyond the 3.5 Tcf currently in play as the injection season's most likely ending storage level.

"August through October temperatures in the Northeast and portions of the Midwest will continue to pressure prices in the Marcellus Shale," said forecasters at WSI (see related story). They see North America inventory levels finishing the injection season above 3,700 Bcf, not much below last year's adjusted level of 3,809 Bcf.

Temperatures in the Northeast will average cooler than normal next month, dampening air conditioning load, but the East and West can expect warmer-than-normal weather to dominate in September and October, thereby lowering early heating demand, according to forecasters.

In the eyes of Tim Evans of Citi Futures Perspective, Thursday's 107 Bcf storage figure "stunned' the market and it remained stunned on Friday, "with no particular sense that the lower price level represented even a short-term buying opportunity."

For the week ended Aug. 1, Evans calculates that the year-on-five-year deficit will contract to 580 Bcf from its present 727 Bcf shortfall. This week's storage build report he places at 104 Bcf, well above last year's 43 Bcf and a five-year build of 47 Bcf.

"This trend shows the market is becoming better supplied on a seasonally adjusted basis, and typically results in downward pressure on prices. Although the declining storage deficit suggests a matching further decline in price, we also want to bear in mind that the market will eventually reach a level that represents a bargain valuation, given that storage may still finish the storage injection season at perhaps 3,500 Bcf, which would put it about 330 Bcf (8.6%) lower than a year ago and 350 Bcf (9.1%) below the five-year average, still relatively lean levels depending on the severity of the winter to follow."

Evans recommends standing aside the market for now pending the identification of a low-risk trade entry.

In a weekly letter to clients, Walter Zimmermann of United ICAP said he sees the market poised to head still lower. "From April 2012 to February 2014 the price action in natgas was driven by short-covering, [but] since Feb 2014 the driver of the price action has been long liquidation. With 47% bulls the most recent sentiment number, natgas is nowhere near a bearish extreme [and] the Elliott Wave question is whether there is any case for support before the 3.660 to 3.480 range."

He added that his "nearest case for support is now the $3.850 area [where] the bulls will need a decisive break out above the $4.100 level to have any case for bottoming action."

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