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Physical Natural Gas Prices Scrambled, Yet Futures Hitch A Ride Higher

Next-day gas prices were widely mixed in Thursday's trading as gains in the Marcellus, Mid-Atlantic, and New England were unable to counter more pervasive weakness in the Gulf, Midwest, Midcontinent, Rockies, and California. The overall market change was unchanged.

Trading in the physical market typically takes a back seat to the futures on Thursday, when the weekly storage figures are released by the Energy Information Administration (EIA), and this week was no exception. Prices scooted higher following the disclosure of withdrawals from inventories of 17 Bcf for the week ending Nov. 14, greater than what the market had been anticipating. The December contract rose 11.8 cents on the day to $4.489 and January was up 13.3 cents to $4.649. December crude oil added $1.00 to $75.58/bbl.

West Coast prices moderated as soft power loads and weak next-day peak power pricing weighed on the market. The California Independent System Operator reported that peak load Thursday of 30,304 MW was expected to decline to 28,930 MW Friday.

IntercontinentalExchange said that next-day peak power up and down the West Coast fell. Friday peak power at SP-15 dropped $3.68 to $49.42/MWh and peak power into Mid C shed $4.48 to $32.45/MWh. At COB next-day peak power settled at $45.70/MWh, down $1.36.

Next-day gas at Malin fell 4 cents to $4.57 and deliveries to the PG&E Citygates were flat at $4.75. At the SoCal Citygates next-day gas was flat at $4.72 and parcels at the SoCal Border shed 8 cents to $4.60. On El Paso S Mainline Friday gas was seen at $4.55, down 11 cents.

Temperatures at West Coast population centers were expected to be right at normal. San Francisco's Thursday high of 60 was forecast to hold Friday and rise to 64 on Saturday, 2 degrees above normal, according to forecaster Wunderground.com. Los Angeles' 68 high on Thursday was anticipated to rise to 69 Friday and back to 68 on Saturday. The normal mid-November high in Los Angeles is 71. San Diego's Thursday high of 68 was seen dropping to 66 Friday and bouncing back to 69 on Saturday. The normal high in San Diego is 68.

Points in the Mid-Atlantic and Northeast registered stout gains. At the Algonquin City gates Friday gas came in at $5.98, up 14 cents and deliveries to Iroquois Waddington gained 11 cents to $5.35. Gas on Tennessee Zone 6 200 L added 13 cents to $5.85.

Gas on its way to New York City on Transco Zone 6 gained 40 cents to $5.19 and parcels on Tetco M-3 rose 20 cents to $4.61.

Weather systems throughout the area were expected to be active. The National Weather Service in suburban Philadelphia said "a weakening frontal boundary would swing through the area this evening and will move out to sea tonight as low pressure moves into the Canadian Maritimes. High pressure will begin building into the area late Friday into Friday night, then south of the area into the weekend. A warm front is expected to lift across the area Sunday night into Monday morning, with a cold frontal passage Monday night."

Gas in the Midwest was steady to lower. Deliveries on Alliance fell 3 cents to $5.00 and gas at the ANR Joliet Hub lost 4 cents to $4.99. Deliveries to the Chicago Citygates were quoted at $5.00, down 5 cents and gas on Michcon was down 1 cent at $4.94. Parcels on Consumers were seen at $4.95, a penny higher.

In its morning six- to 10-day forecast, WSI Corp. predicts still colder temperatures ahead. "[Thursday's] six-10 day period forecast is colder than previous forecasts across much of the nation, except California due to the day shift and model trends. Confidence in the latest forecast is near, if not a bit below average, [and] there is good model agreement during the start of the period, but operational models continue to sharply diverge as the period progresses.

"There are risks in either direction at this time given the spread within the model guidance. The GFS [Global Forecast System] supports an upside risk over the West and a slight downside risk across the East."

The 10:30 a.m. EST release of inventory data by the EIA was expected to show the first withdrawal of the season, but even with the early onset of winter, the pull was not expected to be close to last year. Estimates came in around a 10 Bcf withdrawal. Last year a stout 36 Bcf was withdrawn. The five-year pace stands at a 10 Bcf decline.

Increased production was thought to be moderating the withdrawal. Bentek Energy estimated a draw of 7 Bcf utilizing its flow model, and other estimates included ICAP Energy at a 14 Bcf decline and IAF Advisors with an 8 Bcf pull. A Reuters survey of 25 traders and analysts resulted in an average 12 Bcf withdrawal with a range of declines of 2 Bcf to 33 Bcf.

The actual 17 Bcf decrease caused something of a stir. December futures had shot to a high of $4.502 after the number was released and by 10:45 EST December was trading at $4.410, up 3.9 cents from Wednesday's settlement.

"We were looking at -10 to -14 Bcf in that range. It looks like the production didn't show up or it was colder than expected. Just look at Buffalo [New York] and you can see how that might happen," said a New York floor trader.

"$4.50 is still going to be your resistance level with $4.25 on the downside."

"The 17 Bcf in net withdrawals for last week  was somewhat more than the consensus expectation, a modest bullish surprise," said Tim Evans of Citi Futures Perspective. "However, we expect attention to swing more squarely onto this week’s cold and the likelihood of a large storage withdrawal in next week’s report, which our model currently projects at 131 Bcf, compared with a 6 Bcf five-year average net withdrawal.  The overall outlook remains bullish in our view."

Inventories now stand at 3,594 Bcf and are 201 Bcf less than last year and 244 Bcf below the 5-year average. In the East Region 11 Bcf were withdrawn and the West Region saw inventories decrease 7 Bcf. Stocks in the Producing Region rose by 1Bcf.

"U.S. working gas in storage is now at 3,594 Bcf, 6.4% below the five-year average of 3,838 Bcf and 5.3% below last year's level of 3,795 Bcf," said Randy Ollenberger, an analyst with BMO Nesbitt Burns Inc. "Weather forecasts for the U.S. over the next six to 10 days call for below-average temperatures throughout the majority of the Lower 48, but warmer-than-average temperatures on the West Coast. We believe the [17 Bcf] withdrawal report will be viewed as slightly positive given that it was higher than expectations. The natural gas market is clearly comfortable with current storage levels for the upcoming winter heating season given the continued growth in the Marcellus and associated gas production. We believe natural gas prices are likely to drift until winter weather arrives."

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