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Weak East Tugs Market Lower; September Expiration Inconclusive

It was a tale of two markets in spot trading for Thursday deliveries as eastern points plunged in response to weather forecasts sharply milder than Tuesday, with some locations in the Northeast seeing declines of well more than $1.00.

Weakness was widespread along the Eastern Seaboard, and the double-digit -- and in some cases triple-digit losses -- were able to offset broad gains at market points throughout the rest of country more in alignment with the strong finish by the September futures.

Overall, the market fell 2 cents. September futures expired on a firm note although still within a long-standing trading range between $3.75 and $4.00. September gained 4.6 cents to go off of the board at $3.957, and October gained 5.4 cents to $4.003. October crude oil added 2 cents to $93.88/bbl.

In the East, temperature drops close to 10 degrees were forecast for Thursday. Forecaster Wunderground.com said Boston's high of 89 Wednesday was expected to slide to 81 Thursday and to 72 Friday. The seasonal high in Boston is 78. Philadelphia's 91 high Wednesday was seen falling to 82 Thursday and to 81 Friday, the normal high. Baltimore's 88 high Wednesday was expected to slide to 86 on Thursday and 81 Friday. The typical late August high in Baltimore is 84.

The National Weather Service in Baltimore said "a weak cold front over the Midwest will cross the area” on Wednesday and “high pressure will build across the northern middle-Atlantic Thursday night...lingering off the coast into the weekend. The next cold front will approach the middle-Atlantic early next week."

Natural gas prices in New England tanked. Deliveries to the Algonquin Citygates tumbled $1.31 to average $2.92, and gas at Iroquois Waddington shed 16 cents to $3.95. Gas on Tennessee Zone 6 200 L was seen $1.30 lower at $2.84 and packages on Millennium were off 14 cents to $2.38.

The NGI Bidweek Alert showed September basis at the Algonquin Citygates at $1.35 to $1.25 under Henry, and Iroquois Waddington basis was seen at 30 cents under. Basis on Millennium for September changed hands anywhere from $1.97-1.90 under.

Next-day gas bound for New York City on Transco Zone 6 dropped 13 cents to $2.79, and deliveries to Tetco M-3 shed 15 cents to $2.63.

Parcels on Columbia Gas TCO was flat at $3.99, and on Dominion South, next-day gas sank 12 cents to $2.36. In the Marcellus, gas on Transco Leidy was off 10 cents to $2.23, and on Tennessee Zone 4 Marcellus next-day gas came in 10 cents lower at $2.16.

East losses were in stark contrast to market points from Chicago to the West Coast even though weather forecasts also softened. Wunderground.com said the Wednesday high in Chicago of 78 would weaken to 73 Thursday before recovering to 83 on Friday. The normal high in the Windy City this time of year is 81. Minneapolis' high Wednesday of 79 was expected to drop to 74 Thursday before rising to 80 on Friday, 3 degrees above normal. Indianapolis's high of 89 on Wednesday was seen sliding to 86 Thursday and bouncing back to 89 Friday. The seasonal high is 84.

"A one day respite from heat and humidity” was predicted Thursday by the National Weather Service in Indianapolis, “as a slightly cooler and less humid high pressure system moves across the Great Lakes and pushes the surface front to the Ohio Valley. A trough moving northeast out The Rockies will lift the surface boundary back to the Great Lakes by Friday to return the heat and humidity for the weekend, [and] another trough should reduce the heat and humidity again but not until after the Labor Day weekend."

Price gains in producing regions and other market areas alike posted broad, but less intense gains than the losses in the East. At the Henry Hub, next-day gas was seen at $3.99, up 5 cents, and deliveries to the Houston Ship Channel added a nickel as well to $4.02. At the NGPL Midcontinent Pool, Thursday gas changed hands at $3.87, up 2 cents, and at the Chicago Citygates, gas was higher by a penny at $4.01.

Western prices were also firm. Opal Thursday volumes rose by a nickel to $3.89, and on Transwestern San Juan, next-day gas was seen at $3.97, up 4 cents. PG&E Citygates added a penny to $4.56, and deliveries to the SoCal Citygates added 2 cents to $4.46.

Futures traders said there wasn't much that could be concluded directionally from the way the September contract expired.

"It was very quiet and a lot of traders are out for the Labor Day weekend holiday,” said a New York floor trader. “The market only traded within a 2 cent range the last half hour.”

Near-term directional guidance could come Thursday with the release of Energy Information Administration storage figures for the week ended August 22. Last year 65 Bcf was injected and the five-year average stands at 58 Bcf. If industry estimates are correct, this week will be the 19th straight week the five-year average has been exceeded.

IAF Advisors forecasts a build of 80 Bcf, and Ritterbusch and Associates calculates an increase of 77 Bcf. A Reuters survey of 27 industry cognoscenti revealed an average 78 Bcf with a range of 72 Bcf to 83 Bcf.

According to Tim Evans of Citi Futures Perspective, "book squaring" may have been in play Tuesday when the near-term temperature outlook "continued to trend warmer for the next two weeks, but nearby September futures eased to finish 2.6 cents lower..."

For Thursday's storage injection report, Evans calculates a 78 Bcf build. "[W]e think the consensus view is running close to our own 78 Bcf figure, a bearish figure compared with the 58 Bcf five-year average for the date.

"Although the temperatures for the next two weeks look warmer than a day ago, our model still points to above-average storage injections in the weeks ahead." According to Evans’ forecast, the current year-on-five-year deficit of 535 Bcf will shrink to 462 Bcf by Sept. 12.

"Between the declining year-on-five-year storage deficit that confirms the market is becoming better supplied on a seasonally-adjusted basis and the weaker September seasonal demand that may allow injections to move back above the 100 Bcf mark, we see some near-term downward potential for natural gas prices.

“Once that has been fully priced in, however, we continue to anticipate a seasonal rally ahead of the winter," Evans said in closing comments to clients Tuesday.

Evans suggested working a limit buy order on the October natural gas at $3.68 with an initial protective stop at $3.48 to limit the potential loss on the trade.

Forecasters are calling for expanding warmth. In its Wednesday morning six- to 10-day outlook, Commodity Weather Group showed increased coverage of above-normal temperatures from New England, the lower Great Lakes to Texas. "While next week is an abbreviated one owing to the holiday, the guidance trends are generally warmer for the Midwest, East and South," said President Matt Rogers.

"Chances of showers/storms were reduced in the Deep South, putting less pressure on high temperatures, while more warm ridging is seen pulsing into the Midwest and East. Concerns about a possible cool wedge into the Northeast early next week have also abated.

“This allows temperatures to at least peak in the upper 80s to low 90s more frequently for the East Coast with widespread 80s to some low 90s in the Midwest, too. The West is same to a bit cooler overall” for Wednesday.

"The 11-15 day continues to be a major challenge as the American and European versions are very divided between their typical warm (Euro) and cool (GFS) sides,” said Rogers. “We continue with a mixed view but keep in mind that climatology continues to drop off (cooling normals) deeper into September, too."

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