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NatGas Cash, Futures Part Company; Cash Gains, Futures Slip-Sliding Away

Next-day deliveries of physical natural gas on balance posted modest advances in Monday's trading, with most points scoring gains of a few pennies. West Coast locations were higher on warm weather, but New England and the Mid-Atlantic also rose.

A few thinly traded locations in the Great Lakes, Midcontinent, and Rockies slipped into the loss column. The overall market added 8 cents. Futures trading was uneventful as traders had a hard time identifying any options strikes in play as options went off the board ahead of Tuesday's futures expiration.

At the close, August had fallen 3.4 cents to $3.747, and September was lower by 2.2 cents to $3.765. September crude oil shed 42 cents to $101.67/bbl.

West Coast locations moved higher as warmer temperatures provided a firm undertone to the market.

"Los Angeles will be having a slight increase in temperature as sunny days remain a constant presence over the next several days,” said AccuWeather.com’s Katy Galimberti. Temperatures “will be slightly higher than normal for this time of year, reaching close to the 90 F mark. The usual high is 84.

"Even with the warmer weather, temperatures will not come close to the record high for this week of 109 F, set in 1891. Meanwhile, the dry sunny skies will not provide any much-needed drought relief for the Los Angeles area.”
Los Angeles, she said, remains “in an exceptional drought area” and “continues to struggle with drought relief efforts as minimal rainfall has occurred. All of California is in some type of drought condition as of July 15. 100 % of the state is in a severe drought situation.”

Forecast temperatures came in at well above normal for inland California locations. Monday's high of 97 in Sacramento was expected to hit 100 Tuesday and 99 by Wednesday, ahead of the normal 93.

Fresno, CA's high of 101 could rise to 104 Tuesday before easing to 103 Wednesday. The seasonal high is 99. Burbank's high on Monday of 90 should hold Tuesday and move to 91 Thursday; the normal late-July high is 88.

Power loads are expected to increase across the state. The California Independent System Operator forecast Monday's peak load of 41,112 MW would rise to 44,179 MW Tuesday.

Next-day power at major California power interconnects also were higher. IntercontinentalExchange reported next-day peak power at COB gained $2.55 to $50.03/MWh and deliveries to Mid C rose $2.51 to $45.55/MWh.

Gas for Tuesday delivery at Malin gained 7 cents to $3.87, and packages at PG&E Citygates rose by 6 cents to $4.52. At the Socal Citygates, Tuesday packages were quoted at $4.50, up 7 cents, and SoCal Border gas changed hands at $4.15, higher by 6 cents. Deliveries to El Paso S Mainline were seen at $4.41, up 15 cents.

Industry consultant Genscape Inc. reported declining gas exports from the Midwest to eastern locations.

"This summer, Midwest exports to the East have declined year-on-year, especially on REX [Rockies Express Pipeline] and Vector. Comparing to the previous year, for the past 30-day period, exports out of Midwest on REX declined by -0.5 Bcf/d, and... Vector declined by -0.4  Bcf/d," the company said in a report.

"The decrease on REX is driven by the Seneca lateral coming on line and Marcellus production growth destroying the demand in the East for Rockies gas,” said Genscape. “The decrease on Vector is due to the strong demand from storage injection in Michigan. The decline in imports coincided with the increase in storage injections…

“Midwest storage injection sample averaged at 1.7 Bcf/d in the past 30 days, a plus-0.7 Bcf/d increase from the same period in the previous year. In the previous three years, injections weakened during July and August. This year, with mild summer weather and low inventory levels, injections have remained strong in July, averaging 1.7 Bcf/d, up 0.7 Bcf/d from last July."

Quotes for gas at Midwest points came in steady to higher, while gas in the Mid-Atlantic made double-digit gains. On Alliance, Tuesday parcels rose a couple of pennies to $3.87m and packages at the Chicago Citygates added 3 cents to $3.87. Deliveries to Michcon were flat at $3.95, and gas on Consumers was also unchanged at $3.94. At Demarcation, Tuesday gas was quoted at $3.90, up 5 cents.

Mid-Atlantic locations made solid gains. Gas bound for New York City on Transco Zone 6 rose 18 cents to $2.54m and deliveries to Tetco M-3 were 13 cents higher to $2.52.

At the Algonquin Citygates next day gas increased by seven cents to $2.71, and gas at Iroquois Waddington gained 11 cents to $3.88. Gas on Tennessee Zone 6 200 L rose by 16 cents to $3.00.

Tim Evans of Citi Futures Perspective said Friday's nearly 7-cent decline in the August contract could have been the result of "book squaring" ahead of Monday's options expiration and Tuesday's futures expiry.

"As open interest and volume on the contract decline, there's also some increased potential for volatility if the last of the long liquidation doesn't match up evenly against the last of the short-covering,” he said.

Looking at storage, Evans said "the larger bearish trend remains intact, with refills exceeding the five-year average rate in each of the past 14 weeks. Particularly with the current forecast for cooler than normal temperatures east of the Rockies [this] week, this trend looks likely to continue.”

Evans is looking for a storage build of 89 Bcf to be reported this week, well above last year's 56 Bcf addition and a five-year average of 45 Bcf. By Aug. 8, he expects the year-on-five year deficit will have contracted to 555 Bcf from its current 683 Bcf. "A declining deficit is normally bearish for prices.”

Forecasters call for continued coolness. In its morning six- to 10-day outlook, Commodity Weather Group showed a broad ridge of below-normal temperatures extending from Colorado to West Virginia and Iowa to Louisiana.

"The general sense compared to last Friday's forecast is not quite as cool overall for Midwest, East and South over the next two weeks, with a slight national demand gain; however, we still do not see any major heat concerns with overall demand continuing to track lower than normal through the first half of August," said President Matt Rogers.

"We see hotter changes in California for this week and next (low 90s in Burbank and upper 90s at times in Sacramento), while increases in monsoonal moisture are holding the Southwest back cooler. The six-10 day still favors a cool focus for the Midwest to South, but the modeling shows more variability for the 11-15 day.

“We lean toward the cool side overall, but show some variability in the 11-15 with some weak warmth in the Northeast late in the 11-15. A strong tropical wave in the eastern Atlantic may become Bertha this week, but the routing is favored to avoid the Gulf."

With futures continuing to grind lower, technicians are trying to find a spot where the market might stabilize.

"After this week, it is unclear where the market might find support. There are some candidates and the first is the 0.618 retracement of the entire move up from $1.902 to $6.493 at $3.655. I will be surprised if natural gas does not test this retracement," said United ICAP’s Walter Zimmermann in a weekly webcast to clients.

"If it tests this and holds on the first test, then tries to rally, the minimum requirement for the bulls to have any chance at bottoming action, even after a successful test of $3.655 would be a decisive weekly close above $3.945.

"Let's say natural gas weakens on Monday and holds $3.66; then it would have to close the week above $3.945 for any hope of bottoming action. Otherwise that keeps the door open for another leg down to the $3.48 and $3.41 levels."

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