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Cash, Futures Bears on the Prowl; Spot Futures Hit Eight-Month Low

Weekend and Monday deliveries retreated in Friday's trading as weekend temperature forecasts struggled to make it to seasonal norm. By Monday temperatures were expected to be more than 10 degrees below normal throughout the Midwest and Great Lakes.

The Northeast suffered some double-digit losses, but Appalachia and the Marcellus Shale region also weakened. Losses were widespread, but a few Texas Gulf points managed small gains. The overall market shed almost a dime. Futures trading wasn't any more enlightened, and Thursday's August low of $3.744 was the lowest a spot contract has traded since late November. At the close, August was down 6.6 cents to $3.781 and September had lost 6.3 cents to $3.787. September crude oil added 2 cents to $102.09/bbl.

Midwest and Great Lakes points were down a couple of pennies as forecasters expected temperatures by Monday to plunge well below seasonal norms. In the Midwest, load-killing showers and thunderstorms were in the mix. "Strong and potentially severe thunderstorms will mark the start of the weekend for the Chicago area," said AccuWeather.com's Kevin Byrne. "A couple of spotty showers will move into the area Friday afternoon, but into the evening hours, strong and perhaps severe thunderstorms are expected to develop. Threats from the storms include flooding downpours and hail. Saturday will have intervals of clouds and sun with a shower or thunderstorm around during the day. The chance for a shower or storm will remain into the evening.

"It will be humid on Sunday with a couple of showers and breeze in the afternoon. The severe weather threat will conclude with the end of the weekend as the start of next week looks to bring cooler and more pleasant conditions."

Wunderground.com forecast Chicago's Friday high of 77 would rise to 86 Saturday, but by Monday highs were expected to reach only 71.The seasonal high in Chicago is 84. Milwaukee was forecast to see its Friday high of 74 reach 85 on Saturday before dropping to 71 on Monday. The normal late-July high in Milwaukee is 80. Indianapolis' Friday high of 78 was predicted to reach 90 by Saturday but slide to 74 on Monday. The normal high in Indianapolis this time of year is 85.

Weekend and Monday deliveries on Alliance fell a penny to $3.85, and gas at the Chicago Citygates dropped 3 cents to $3.84. At NNG Demarcation, packages were seen at $3.85, down 3 cents, and on Consumers weekend and Monday gas fell 2 cents to $3.94. Parcels on Michcon fell a penny to $3.96.

Greater declines were seen at eastern points. Gas at the Algonquin Citygates fell 16 cents to $2.64, and deliveries to Iroquois Waddington shed 13 cents to $3.77. Tennessee Zone 6 200 L was off by 7 cents to $2.84.

On Millennium East Pool, weekend and Monday gas was seen at $2.38, down 15 cents, and on Transco Leidy deliveries came in at $2.20, down 12 cents.

Appalachia locations were also soft. Gas on Columbia TCO shed a penny to $3.73, and on Dominion South, packages skidded a dime to $2.28.

According to Teri Viswanath, director of commodity strategy for natural gas at BNP Paribas, "[Thursday's] market reaction was probably more a temporary lull in selling rather than a fundamental trend change. To be sure, rapid institutional deleveraging has occurred over the past several weeks as the cumulative effect of more than two months' worth of outsized storage injections weighs on market sentiment. What's more, the persistent mild weather might further embolden short-sellers as the current restocking trend is extended through August."

She also recognized the "possibility for further price deterioration, [but also] expects that the threat of economic fuel-switching and the potential for early heating demand will quell some of the selling interest at current price levels."

To some traders, Thursday's 8.5-cent gain following the release of a somewhat smaller than anticipated storage build seemed about right, but whether it can carry forward is a different question.

"[W]e are suspect of the ability to maintain [Thursday's] modest gains without major assistance from some warming in the temperature forecasts," said Jim Ritterbusch in closing comments Thursday to clients. "As seen on numerous occasions, a significant miss in weekly storage data can be easily overshadowed within 10 or 12 hours by changes to the one- to two-week temperature outlooks. So far, we are not seeing much shift with the six-10 day forecasts that are advising significantly below normal trends across a broad chunk of the Midcontinent with deviations in some regions exceeding 15 degrees."

With cooler than normal temperatures dominating the trading landscape, the coast seems clear for additional hefty storage builds, possibly landing ending inventories close to last year's 3,816 Bcf final tally. "The prospect of an additional two and maybe three larger than normal supply injections will tend to restrict additional upside follow through. Although the August contract may be able to fill last Monday's downside price gap between 3.89 and 3.93, a further extension of gains would appear unlikely. [Friday's] trade will likely provide some price consolidation largely within today's parameters with next the significant price swing deferred until Monday when weekend updates to the temperature views will need to be priced in. While [Thursday's] price advance tightened the front switch in virtually erasing a modest 1 ½ cent contango, we expect a carrying charge to be reestablished ahead of Tuesday's August contract expiration," Ritterbusch said.

"All in all, we are maintaining a bearish stance as we feel that a 5-6 Bcf miss in the storage data from average street ideas isn't capable of offsetting an unusually cool summer that is showing no sign of completion. We will also note a potential need to begin subtracting some storm premium as Caribbean wave activity has been quiet thus far during this hurricane season."

WSI Corp in its Friday morning outlook showed substantially below normal temperatures extending from Colorado to Connecticut. "[Friday's] six-10 day forecast is not quite as cool as yesterday's over most of the eastern two-thirds, especially across the northern tier of the nation. No major changes out West where above to well above normal temps continue, especially over the interior Northwest. Confidence in this forecast is average, perhaps near to slightly above average early in the period. Models maintain the amplified pattern dropping the deep trough down into the Southern Plains and Deep South while ridging builds across southern Canada and the northern tier."

WSI advocates "a slight cooler risk over the Mid South (including Texas) early in the period. Otherwise, the risk begins to shift to the warmer side over the latter half of the period south and east of Chicago."

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