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Cash, Futures Race Lower; September Off by Double Digits

Next-day deliveries of physical gas traded lower at nearly all points Wednesday. Prices were off by about a nickel to a dime across the board, with only a handful of locations making it to the win column.

Unsupportive short-term weather patterns proved to be the market's demise all along the Eastern Seaboard, but the slide was aided by double-digit losses in the futures arena. At the close, September had fallen 14.3 cents to $3.831 and October was down 13.9 cents to $3.862. September crude oil gained 22 cents to $97.59/bbl.

At eastern points losses of a dime or more were common as forecasters called for a cold front to pass through New York with the possibility of additional load-killing showers and thunderstorms. The National Weather Service (NWS) in New York City said "a cold front will continue to move through the region [Wednesday] evening. A trough of low pressure then moves across on Thursday. Weak high pressure will build in on Friday and Saturday...then a cold front will move across on Sunday. Weak high pressure will briefly return for Monday. Low pressure will approach from the west on Tuesday...and pass through on Wednesday.

"Some additional showers are developing behind the front...so some areas may see some additional rainfall...but nothing like what was observed last night and early this morning. Any showers that develop should taper off by midnight with drier weather expected after midnight."

Thunderstorms or drier weather, take your pick, but in either case temperatures at eastern points could only approach average highs. Wunderground.com predicted that the high Wednesday of 73 degrees in Hartford, CT, would rise to 78 on Thursday before receding to 76 on Friday. The normal high in Hartford in mid-August is 79. Providence, RI's 71 high on Wednesday was expected to also reach 78 Thursday and ease to 77 on Friday. The normal high in Providence is 82. Albany, NY, was forecast to see a high Wednesday of 74 and 75 on Thursday. By Friday the high was seen sliding to 71, 10 degrees below normal.

Gas headed for New York City on Transco Zone 6 fell 11 cents to $2.51, and parcels on Tetco M-3 fell 11 cents to $2.48.

Next-day deliveries into Iroquois Waddington fell 2 cents to $3.80, and gas on Tennessee Zone 6 200 L shed 2 cents to $2.72. Packages on Millennium for Thursday delivery were seen down 10 cents to $2.25.

Additional gas is now available to Midwest storage operators as exports to Appalachia have decreased, according to an industry analysis. Industry consultant Genscape reported that "Appalachia production has maintained its growth rate of over +4.0 Bcf/d year-on-year this summer. The increase in production has offset some of Appalachia’s demand for gas from the Midwest. Midwest exports to Appalachia decreased by -0.6 Bcf/d year-on-year in the past three months.

"While overall exports decreased by -1.1 Bcf/d for Midwest, total imports decreased by a lesser amount of -0.7 Bcf/d. The extra gas is being injected into the ground by storage operators. Storage injection rates in Midwest averaged 1.6 Bcf/d in the past three months, +0.5 Bcf/d higher than the average of 1.1 Bcf/d in last June to last August."

Price differentials are aiding storage. "Current spreads between the remaining of the summer and the winter is 25 cents for Michcon and is 33 cents for Chicago. Both are encouraging storage injections. Not only do timing spreads incentivize marketers to flow gas, a majority of the storage contracts in the Midwest are held by LDCs, who inject to ensure there are no supply interruptions to consumers in the winter, the firm said."

Next-day gas at Columbia Gas TCO shed 6 cents to $3.88, and deliveries to Dominion South were off by 7 cents to $2.33.

In the Marcellus, gas at Transco Leidy fell 8 cents to $2.07, and parcels on Tennessee Zone 4 Marcellus slid 10 cents also to $1.98.

Futures traders saw some logic in the market's decline. "We had three attempts to meaningfully breach $4, and the market failed. Three attempts is about par for the course, and we always talk about the $3.81 to $3.83 area as a point to fall back to in order to make another run if it in fact is going to do that," said a New York floor trader. "I think the bulls will 'hold the fort' here and try to build a base to move prices higher."

Holding the fort may be a challenge in the face of an expected inventory report Thursday showing above normal injections and a continuing contraction in the storage deficit. The 10:30 a.m. EDT report by the Energy Information Administration is anticipated to show an increase of 84 Bcf, well above last year's 70 Bcf and a five-year average pace of 45 Bcf.

Analysts at United ICAP predict an increase of 83 Bcf, and IAF Advisors in Houston predicts a build of 85 Bcf. A Reuters survey of 24 traders and analysts revealed an average 83 Bcf with a range of 75-91 Bcf.

Tim Evans of Citi Futures Perspective said Tuesday's market romance with the $4 level is "supported by warmer than normal temperatures forecast for the next two weeks and possibly some anticipation of a seasonal rally ahead of the winter."

He notes that the market is continually being better supplied. "Thursday's DOE storage report for the week ended Aug. 8 may give the market its fundamental push, with market expectations apparently running relatively close to our own model's 84 Bcf forecast from the handful of early estimates we've seen so far," Evans said. "An 84 Bcf refill would outpace both the 69 Bcf build from a year ago and the 44 Bcf five year average net injection, confirming that the market became better supplied on a seasonally adjusted basis for a 17th consecutive week."

His data shows that temperatures are expected to "turn slightly warmer again on Tuesday and will help to limit storage injections over the next two weeks to something nearer the five-year average rate."

If his projections are correct, the year-on-five-year average storage deficit would contract to 515 Bcf by Aug. 29. "The slower pace of injections over the next two weeks may relieve some of the immediate downward pressure on prices, but we'd bear in mind that tighter balance is only a function of the weather pattern and that the background growth in natural gas production remains in place," he said.

He pointed out that Tuesday's EIA Short Term Energy Outlook pegs U.S. dry gas production at a new record of 70.21 Bcf/d, up by 3.25 Bcf/d, 4.9%, from a year ago.

Bottom line, Evans recommends standing aside until a low-risk entry can be identified.

That record production, no doubt, was on the mind of the Energy Information Administration' forecast that spot natural gas prices would weaken through October. NGI noted in a report Tuesday that "natural gas spot prices, which fell to $3.78/MMBtu at the end of July after starting the month at $4.47/MMBtu, are expected to remain below $4.00/MMBtu through October before ramping up with winter heating demand, according to EIA's latest Short-Term Energy Outlook (STEO) [see Daily GPIAug. 12].

"The agency expects Henry Hub prices to average $4.46/MMBtu this year and $4.00/MMBtu next year. Both estimates are significantly lower than in the previous STEO, when EIA projected that Henry Hub natural gas prices would average $4.77/MMBtu this year and $4.50/MMBtu in 2015."

WSI Corp. in its morning six- to 10-day forecast said, Wednesday's outlook is "generally warmer than the past forecast across the East into the Mid West, mainly due to the period shift. A good portion of the West and Northern Plains is cooler. Confidence in the forecast is about average based on reasonable ensemble model agreement, but there remain technical differences. Confidence is also hampered a bit during periods of pattern transition."

Risks to the forecast include upside in "the lower Midwest into the Northeast during the back half of the forecast period. The Northwest and Northern Rockies could run cooler."

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