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Heating Season On Third Weekly Gain; Volatile Trading Expected To Continue

The newly minted heating season is off to a robust start and weekly gains in the NGI Weekly Spot Gas Average are on a three week roll. For the week ended Nov. 21 the NGI Weekly Spot Gas Average added a hefty 31 cents to bring the average to $4.49. This is on the heels of the two prior week's additions of 27 cents and 55 cents, respectively.

Prices and cold weather go hand in hand and nowhere was that more apparent than the experience of Buffalo, NY, with its seven foot accumulation of snow, collapsed roofs and 12 deaths.

Solid double-digit gains were posted at all but a handful of points with market zones showing the greatest gains. Of the actively traded points Transco Zone 6 New York took first place with a gain of $2.00 to $5.78, but right behind was Transco non NY with a gain of $1.88 to $5.68. Transco Zone 5 came in at a $1.44 rise to $5.67 and Iroquois Zone 2 added $1.19 to $5.80.

Of the few locations showing declines actively traded Transco Leidy took that dubious honor with a fall of 42 cents to $2.81 and Tennessee Zone 4 Marcellus shed 38 cents to $2.64. Millennium East Pool was off 9 cents to $3.32.

Producing Zone gains were not on the same level as those of market zones, but Northern Border Ventura was out front with a gain of 39 cents to $4.82 and the Cheyenne Hub and White River Hub both added 28 cents to $4.53 and $4.44, respectively.

In a volatile week of trading December futures added 24.6 cents to $4.266.

Thursday's inventory report caught a few by surprise. The market scooted higher following the disclosure of withdrawals from inventories of 17 Bcf, greater than what the market had been anticipating. December futures 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. By the end of the day December was up 11.8 cents to $4.489 and January was higher by 13.3 cents to $4.649.

The data 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 Last year a stout 36 Bcf was withdrawn.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.

"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."

Analysts sense that even with recent cold and extreme conditions experienced by Buffalo, NY with its seven feet of snow and 12 deaths, supplies should be ample for the upcoming winter. Analyst Teri Viswanath of BNP Paribas and meteorologist Anneliese Alexander took a look at the market/weather universe and noted that just one month ago most forecasters had predicted November would be mild across the country, Alexander said. The pictures from Buffalo, NY, have convinced a lot of people that winter once again is going to be a frigid slog.

Yes, it will be a colder than normal winter, according to BNP Paribas. But another polar vortex? Alexander isn't convinced.

Paribas said the market may not be convinced that natural gas storage is adequate to sustain demand through another severely cold winter, but sustained output from Appalachia should convince the skeptics soon enough.

U.S. gas supply should overwhelm demand through 2015, said Viswanath. In addition Alexander said she isn't convinced another polar vortex is likely either. The country now appears to be about a month into a "weak" El Nino, she said, which likely continues through winter. Even a weak El Nino would mean colder temperatures, as noted last month by Weather Services International.

Other signals of a below-normal winter are warm waters along the West Coast and Alaska, which would push colder temperatures into the Lower 48 states, said Alexander.

In addition, October Siberian snow coverage was above normal, pointing to the odds of a negative Arctic oscillation (AO). Negative AOs on average indicate colder U.S. temperatures.

"I think there's still a concern here for the next month at least" on the winter forecast, said Alexander. "There's a lot of volatility, and we are struggling to figure out what's going on here."

In Friday's exchanges for weekend and Monday packages traders attempting to make decisions had a pretty easy time as both an imploding screen and weekend weather forecasts signaled little problem in procuring ample supplies at low prices.

Deep double- and triple-digit losses permeated both market zones and producing zones. Hardest hit was New England with $2 plus declines, and the average drop at all market points was a stout 42 cents. In the early going, futures were called 19 cents lower, and that set the stage for a cash and futures market rout. At the close, December had fallen 22.3 cents to $4.266 and January shed 23.2 cents to $4.417.

One New York analyst put the recent movements of the market in a psychological context. "The market seems conflicted and we can't blame it," said Breanne Dougherty of Societe Generale. "The immediate-term balance impact of the early cold snap can't be denied, but the underlying strength of domestic production and statistical unlikelihood of another polar vortex this year provide an overarching bearish pressure. We see more bullish than bearish pressure around a neutral $4.25/MMBtu handle over the next three weeks but continue to warn of how quick and dramatic a price correction can be if weather outlooks moderate."

Moderating weather outlooks were definitely on the table Friday. forecast that New York City's Friday high of 36 would reach 42 on Saturday and a balmy 68 by Monday. The seasonal high in New York is 52. Chicago's Friday high of 32 was seen advancing to 47 Saturday before easing to 42 Monday. The typical mid-November high in Chicago is 46. Denver's 56 high Friday was predicted to climb to 60 Saturday before receding to 44 on Monday, 5 degrees below normal.

Weekend and Monday gas at the Algonquin Citygates fell $2.11 to $3.87, and deliveries to Iroquois Waddington skidded 49 cents to $4.86. On Tennessee Zone 6 200 L, three-day packages changed hands down $2.10 to $3.75.

Gas destined for New York City on Transco Zone 6 tumbled $2.00 to $3.19, and packages on Tetco M-3 fell $1.44 to $3.17.

Forecast peak power loads and peak power pricing also was impacted. The PJM Interconnection reported that Monday's peak load was expected to reach 34,709 MW, just slightly above the typically low demand Saturday expected to be 34,548 MW. By contrast, Friday's peak load was predicted to reach 38,941 MW. ISO New England said Friday's peak load of 18,000 MW would fall to 16,900 MW Saturday and 16,300 MW Sunday.

IntercontinentalExchange said peak power Monday at the PJM West terminal dropped $12.93 to $35.92/MWh and peak power Monday in eastern New York (Zone G) tumbled $36.26 to $45.00/MWh.

On Millennium, weekend and Monday gas shed 82 cents to $2.30, and deliveries on Dominion South changed hands 86 cents lower at $2.85.

On Transco Leidy, parcels came in at $2.68, down 38 cents, and on Tennessee Zone 4 Marcellus weekend and Monday gas retreated 51 cents to $2.33.

"The frigid air mass will release its icy grip on Chicago as the weekend approaches, allowing warmth to trickle in," said meteorologist Becky Elliott. "The past week and a half has been headlined by an arctic chill, but that will go away this weekend. The dome of arctic air is forecast to gradually shift off to the east, when southwesterly winds will usher warmer air into the region ahead of a developing storm system.

"As this occurs, there may be a period of freezing rain late Friday night before precipitation changes to rain. The weekend should feel a little more seasonable as temperatures are projected to rebound into the 40s and perhaps even make it near 50 on Sunday. Rain will last through the weekend and will be around for the Chicago Bears game on Sunday."

Market zones in the Midwest and back into the Midcontinent also saw cascading prices. Gas on Alliance for the weekend and Monday fell 20 cents to $4.80, and at the ANR Joliet Hub gas was quoted at $4.78, down 21 cents. Deliveries to the Chicago Citygates shed 21 cents to $4.79, and on Michcon gas changed hands at $4.78, down 16 cents. Gas at Northern Natural Ventura fell 29 cents to $4.65.

Near-term temperature forecasts moderated overnight, although by the coming week cold was expected to re-emerge. "Arctic temperatures will gradually thaw over the Midwest and Northeast the next several days and will become warmer than normal by Sunday," said in its Friday morning forecast.

"A weather system tracking out of Texas Saturday will bring heavy rains and powerful thunderstorms, while a colder system will arrive over the north-central U.S. early next week with areas of rain and snow. There will be a much colder weather system late Thanksgiving Day that will bring a more intense blast of chilly northern Canadian air to the Midwest and Northeast, which will likely last through the holiday weekend."

Analysts surveying the trading landscape see a market vulnerable to the downside. "[Thursday's] wide price swings following a seemingly bullish storage figure attest to a variety and unusual volatility within the short-term temperature forecasts," said Jim Ritterbusch of Ritterbusch and Associates in closing comments Thursday to clients.

"Views have been rapidly changing, and clear trends much beyond a week or so have been of low confidence. In any event, consensus of ideas still favors a renewed bout of abnormally cold trends across a broad part of the Midwest within the six-10 day time window. And beyond next week, most forecasters are still favoring moderately below-normal trends well into the first week of December. While this would appear to keep the market well supported above the $4.30 area per January futures into next week, [Thursday's] trade reinforced our expectations that upside price follow-through to above last week's highs will prove limited.

"[Thursday's reported] 17 Bcf supply draw that was the first decline of the season was about 6 Bcf larger than average street expectations. Initial response pushed nearby values slightly above highs of this week and last but upside follow through was restricted to less than a couple of cents."

Expectations for next week's early (Wednesday) release of storage figures are starting to coalesce deep within triple-digits. Ritterbusch contends that "supply is still approaching 3.6 Tcf even after last week's larger than expected decline. This deficit of only about 6.4% against last year will provide a cushion against extended cold spells, especially when combined with a near-record pace of production. These supply side factors will be forced to the front from the back burner once temperatures show some normalization."

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