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Analyst Suggests Cool-Down Not Priced In; October Called a Penny Higher

October natural gas is set to to open a penny higher Friday morning at $3.83 as traders engage in nominal short-covering before the weekend. Overnight oil markets were narrowly mixed.

Joe Bastardi, meteorologist at WeatherBELL Analytics, has "high" confidence of a cool-down in the midsection of the country over the next two weeks. That said, cooling requirements are expected to be only normal. WeatherBELL calculates that nationally, cooling degree days (CDD) for the next 15 days will tally 100.4, well below last year's 130.2 CDD but about right in line with 30-year averages of 104.3 CDD.

In his morning 20-day Energy Outlook, Bastardi said, "The ECMWF [European model] weeklies are very cool starting Monday centered over the nation's midsection, with less cool toward the West Coast and East Coast. The axis of the cool is right down the Mississippi Valley, and this contradicts what I think September will look like overall as I expect this cool shot to even out and even reverse the very warm start in the South and East. We should go back to where we were for the end of the month to rally the temperatures."

Analysts don't see the expected cool-down as having been fully discounted by the market and expect prices to work lower. "Some short-covering that is often seen on Fridays ahead of possible updates to the temperature views will be diminished given the ongoing temperature cool-down and the approach of the shoulder period," said Jim Ritterbusch of Ritterbusch and Associates in a Friday morning note to clients. "With the temperature factor rapidly declining in importance, line of least price resistance remains heavily tilted toward the downside in our opinion. So notwithstanding this week's price plunge that has approximated 25 cents, we still see a further reduction in value of some 20-25 cents going forward as storage injections remain elevated as a result of a near-record production pace that is being accentuated by limited supply disruption into the GOM region.

"With the temperature forecasts suggesting sharply downsized [electric generation] demand when looking out over the next couple of weeks as well as the next two months, strong output rates will become increasingly transparent and could prompt some triple-digit storage increases beyond next week. We look for next Thursday's report to be downsized as a result of hot temperatures in recent days that have spread across key consuming regions. However, the main focus will likely be on storage guidance to be issued during the second half of this month when some huge injections may still need to be priced in."

Randy Ollenberger, an analyst with BMO Nesbitt Burns, said, "Storage injections will need to average roughly 121 Bcf per week over the balance of the injection season to refill U.S. storage levels to the five-year average of 3.8 Tcf, which is clearly unlikely. However, the market is plainly comfortable with anticipated storage levels of 3.4-3.5 Tcf by the start of the winter heating season given the continued growth in the Marcellus and associated gas. Winter weather will now be the key determinant of prices over the next six months."

In overnight Globex trading, October crude oil fell a penny to $94.44/bbl and October RBOB gasoline gained a cent and a half to $2.6147/gal.

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