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Eastern Weather-Driven Strength Can't Offset Wider Weakness; October Slumps Again

As the heat wave baking the East and Northeast continued, so did the strength in next-day gas prices for Thursday delivery. Unrelenting heat, prompting high power loads and temperatures as much as 10 degrees above normal, pushed quotes in New England well over $4.00 and kept next-day gas in the Mid-Atlantic firm as well.

The robust pricing in the East, however, was not enough to elevate the entire market and weakness more in tune with the sagging screen at most other points pulled the market lower.

Overall physical prices were down 3 cents. Futures continued the trek lower begun on Tuesday and October slid another 4.3 cents to $3.847 and November fell 4.4 cents to $3.894. October crude oil staged a healthy rebound from Tuesday's drubbing and added $2.66 to $95.54/bbl.

Temperatures along the East Coast were forecast to not only remain well above normal, but were expected to keep rising into the weekend. AccuWeather.com predicted that the Wednesday high in Boston of 83 would reach 85 on Thursday and 88 by Friday. The seasonal high is 76. New York City's 85 high on Wednesday was seen advancing to 86 Thursday and 87 Friday; the normal early September high is 80. Baltimore's 82 maximum Wednesday was forecast to jump to 88 Thursday and 91 on Friday. The seasonal high in Baltimore is 82.

"Unseasonable warmth for early September will continue along much of the Atlantic Seaboard into Saturday with tens of millions now back in school and work,” said AccuWeather.com meteorologists. “The combination of temperature, humidity, sunshine, light winds and other factors will push [heat index] temperatures from Atlanta and Savannah, GA, to Philadelphia and New York City past the 90-degree mark most days this week, [and] on occasion, [heat index] temperature will approach 100 F for a few hours during the late morning and afternoon in some cities."

If that weren't enough, the forecasters predicted another “surge of heat and humidity will push northward by Friday. New York City had its hottest day of the summer on Tuesday with a high of 92 F. [Heat index] temperatures climbed well above 100 F at Atlanta, Charlotte, NC, and Richmond, VA on Tuesday.

Most nights will remain uncomfortably warm and humid, especially in urban areas along the Interstate 95 corridor this week. The combination of high and low temperatures through Saturday will average about 10 degrees above normal."

According to AccuWeather.com meteorologist Paul Pastelok, "the unseasonable warmth and high humidity will continue through Saturday over much of the South. After a slight dip in temperatures and humidity levels Wednesday into Thursday, both will spike Friday into Saturday.

“Relief from the Delmarva Peninsula to the Carolinas and northern Georgia will have to wait until later this coming weekend, when a stronger push of cooler and less humid air will arrive and will reach through the mid-Atlantic and part of the South."

Elevated power loads in New England and the Mid-Atlantic were seen dipping on Thursday before climbing Friday. ISO New England forecast Wednesday's peak load of 20,300 MW would ease to 19,400 MW Thursday before reaching 20,500 MW Friday. The New York Independent System Operator said peak load Wednesday of 26,151 MW would moderate to 26,036 MW Thursday before jumping to 26,945 MW Friday.

Consistent with the dip in expected peak power loads, next-day peak prices eased across the East. The IntercontinentalExchange reported Thursday peak power delivered to western New York (Zone A) fell $1.20 to $43.80/MWh, and at ISO New England's Massachusetts Hub, next-day peak power lost $1.15 to $4.9.67/MWh. Across the broad PJM footprint, next day peak power at the PJM West delivery point fell $5.28 to $47.70/MWh.

Next-day gas deliveries at the Algonquin Citygates rose 1 cents to $4.32, and gas on Tennessee Zone 6 200 L added 8 cents to $4.25.

Packages headed for New York City on Transco Zone 6 rose 3 cents to $3.11, and packages on Tetco M-3 gained 6 cents to $2.94.

At market centers elsewhere, quotes declined along with the weak screen.

On Alliance, next-day gas was seen at $3.93, down 8 cents, and gas at the Chicago Citygates changed hands at $3.92, down 8 cents. On Michcon, Thursday parcels came in at $3.96 down 9 cents, and Consumers gas fell 7 cents to $3.99. At Demarcation, gas fell 6 cents to $3.89.

Producing zones were also soft. Gas on ANR SE shed 9 cents to $3.86, and packages at the Henry Hub garnered $3.94, 7 cents less than Tuesday's trading. Gas at Transco Zone 3 was seen down 11 cents to $3.90, and gas on Tennessee 500 L was quoted at $3.87, down 9 cents.

Thursday's Energy Information Administration storage report might be able to give the bulls a means to recover from the last two days' nearly 22-cent shellacking seen in the October contract. A report less than trader expectations often causes abrupt price rallies once the number is released at 10:30 a.m. EDT.

Estimates, however, have a decidedly bearish tone as industry experts expect gains in storage well above historical norms. Last year 60 Bcf was injected and the five-year average is for a 56 Bcf build. United ICAP predicts an injection of 72 Bcf and Houston-based IAF Advisors calculates a 76 Bcf increase. A Reuters survey of 23 traders and analysts revealed an average 73 Bcf with a range of 68 Bcf to 76 Bcf.

Wells Fargo analysts David Tameron and Gordon Douthat took a look at Tuesday's price action and put it into a kind of historical perspective. "We looked at the past five years' price action for the same day and saw that [Tuesday’s] drop was the largest since 2008. Meanwhile, between 2009-2013, price movement the day after Labor Day ranged from minus 2% to 3% with the average about 1.3% -- so what gives?"

Tuesday's free-fall of more than 4% clearly falls outside that range, and Tameron and Douthat admitted they aren't quite sure why the drop was so large. They offered the observation that "sentiment swings to extremes, and there is seasonality in natural gas prices, [and]...over the past 20 years, the October contract has finished higher than the September contract 16 of 20 years with average uptick about 12.5%. This could lead to short-term opportunities within gas-levered names."

By all accounts, any 12.5% rise in the October contract is going to have to fight some serious production headwinds. Tameron and Douthat note that the EIA’s monthly report for June issued last Friday found that on a year/year (y/y) basis, “Lower 48 production grew 5 Bcf/d (plus 6.8%) while total U.S. production was up 5.61 Bcf/d (plus 6.9%); 'Other States' posted the largest (and quite impressive, in our view) y/y rise at 5.1 Bcf/d (plus 19.6%) while Louisiana posted the largest decline (minus 15.3%, or mus 1 Bcf/d)” ([see Daily GPIAug. 29).

Tuesday's nearly 18-cent drubbing underscores just what kind of weather and temperature regime is necessary these days to score even a neutral storage result, according to Tim Evans of Citi Futures Perspective. Evans calculates a 70 Bcf build for Thursday's EIA storage report but sees future injections approaching 100 Bcf. The current year-on-five-year deficit stands at 518 Bcf, and if Evans' figures are correct, that will narrow to 466 Bcf by Sept. 19.

"With seasonal cooling demand tapering off, we note the rate of storage injections will also be rising in the weeks ahead, with an associated risk that we may see new lows in price before heating demand ramps high enough to bring the market back into a stronger seasonal balance."

Evans still ultimately favors the long side with a limit buy order in the October contract at $3.68 concurrent with a protective sell stop at $3.48 to limit risk on the trade.

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