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Natural Gas Physical, Futures Climb Before Late-Winter Cooling; April Adds 14 Cents

Physical natural gas for Wednesday delivery surged Tuesday in front of forecasts calling for a sharp incursion of cold air dropping Northeast temperatures by as much as 20 degrees from Monday's readings. Power prices and forecast loads returned the favor and advanced as well.

Only two market points failed to trade higher, and the overall average gain was 40 cents to $2.93, with New England points leading the pack higher with multi-dollar gains. Futures prices managed an advance of their own as longer-term forecasts changed overnight Monday and indicated cooler temperatures as well. At the close, April had gained 13.9 cents to $2.855 and May was higher by 13.3 cents to $2.872. April crude oil continued its trek lower falling 42 cents to $43.46/bbl.

Surging next-day peak power provided a firm economic framework for next-day gas purchases for power generation across key eastern grids. Intercontinental Exchange reported that peak Wednesday power at the ISO New England's Massachusetts Hub jumped $35.81 to $89.27/MWh and peak power at the New York ISO's Zone A (western New York) delivery point rose by $6.50 to $37.50/MWh. On the PJM power grid, next-day peak power rose by $10.36 to $44.76/MWh.

At the Algonquin Citygates gas for Wednesday delivery jumped $6.59 to $12.16, and deliveries to Iroquois Waddington gained 84 cents to $4.04. Gas on Tennessee Zone 6 200 L vaulted $5.89 to $11.00.

In the Marcellus region prices also firmed. Deliveries on Millennium gained 15 cents to $1.63, and gas on Transco Leidy was seen 11 cents higher at $1.52. Deliveries to Tennessee Zone 4 Marcellus were quoted 4 cents higher at $1.35. Packages on Dominion South gained 37 cents to $2.15.

In the Mid-Atlantic parcels delivered to major metropolitan areas gained as well. Gas bound for New York City on Transco Zone 6 gained 20 cents to $2.85, and deliveries on Tetco M-3 changed hands 50 cents higher at $2.51.

Power usage was also forecast to rise. ISO New England predicted that peak load Tuesday of 16,610 MW would advance to 17,500 MW Wednesday before easing slightly to 17,030 MW Thursday. The New York ISO said peak load Tuesday of 19,507 MW would reach 20,302 MW Wednesday and then ease to 19,765 MW Thursday. PJM Interconnection forecast that Tuesday's peak load of 33,394 MW would climb to 36,749 MW Wednesday and continue higher to 37,125 MW Thursday.

Behind the increased gas and power usage were weather forecasts calling for a late-winter blustery change. The National Weather Service in southeast Massachusetts said, "a cold front shifting offshore this evening [Tuesday] will allow cold air and gusty winds to move across southern New England into tomorrow. Fast-moving low pressure may bring rain and/or accumulating wet snow sometime Friday into early Saturday. An Arctic cold front crosses the region Saturday evening...bringing dry but unseasonably cold weather Sunday into Monday."

Forecaster Wunderground.com predicted that the Tuesday high in Boston of 51 would plunge to 30 on Wednesday and recover somewhat to 35 Thursday. The normal high in Boston around St. Patrick's day is 46. New York City's 55 high on Tuesday was seen tumbling to 40 Wednesday and rising to 45 Thursday, five degrees below the seasonal norm. Philadelphia's Tuesday maximum of 65 was expected to drop to 44 Wednesday and climb back to 48 Thursday, the seasonal norm.

Producing region points also participated in the gains. Next-day deliveries to NGPL TX OK gained 13 cents to $2.69, and gas on ANR SW added a dozen to $2.46. On Panhandle Eastern Wednesday gas changed hands at $2.47, up 14 cents, and on OGT next-day parcels came in 11 cents higher at $2.53. Gas at Demarcation added 15 cents to $2.66.

Gas plant operators and processors are finding that ethane extraction is not a viable economic undertaking. According to industry consultant Genscape, "ethane rejection is on the rise again after reaching a six-month low in January. Spring Rock's Weekly Ethane Rejection report released [Monday] estimates there is 1,386 MMBtu/d of ethane being left in the Lower 48 natural gas stream. This equates to roughly 790 MMcf/d of the gas stream being comprised of ethane, nearly 300 MMcf/d greater than last March's rejection levels. Rejection levels peaked in August 2014 at 888 MMcf/d, then bottomed out in January at 778 MMcf/d.

"Spring Rock estimates show the highest rates of rejection continue to occur in the Northeast, followed by North Dakota, Wyoming, and Illinois/Kentucky-area. Spring Rock estimates 219 MMcf/d-equivalent of the rejection is a product of infrastructural constraints, exclusively in the Northeast. However, the vast majority of the rejected ethane is a product of non-supportive economics. The CME reported forwards price for Mont Belvieu ethane do not crest the $10/bbl mark through 2016. When converted to $/MMBtu, forwards ethane prices remain lower than Nymex gas."

Futures traders looking at Tuesday morning outlooks found weather forecasters calling for cooler trends. Commodity Weather Group in its six- to 10-day forecast said, "Some cooler to colder trends have occurred for the six-10 day in the last two model cycles, offering changes for the Midwest, East and South that returned some previously lost demand back to the forecast. The main event is a cold push from Sunday through Tuesday next week that lingers somewhat into Wednesday before the pattern gets more variable again for the 11-15 day.

"Some relaxation in the El Nino atmospheric response later this week and weekend could enable this outbreak to indeed have some more muscle, but we then see a more variable Pacific pattern again going into the 11-15 day. Western warming weakens over the period as some increase in undercutting Pacific flow may initiate," said Matt Rogers, president of the firm.

Commenting on Monday's price easing, Teri Viswanath, director of commodity trading strategy at BNP Paribas said, "in the absence of weather-related support, natural gas prices continue to decline as the winter heating season draws to a close. Indeed, milder weather already forced a few storage facilities to convert from withdrawing to injecting last week, supporting the possibility of a net build before month-end.

"While the nominal beginning of the injection season is April 1st each year, we note that there have been net injections in March during six of the past 11 years. Based on the updated outlook for the month, we anticipate that the industry will record at least one net injection before the official start of the 2015 injection season. We expect that the industry will hit the brakes on winter de-stocking, with storage withdrawals falling sharply from the record 198 Bcf reported for the week ending March 6th to a possible 40-45 Bcf draw for the week ending March 13th and a net build of 15-20 Bcf for the week ending March 20th."

If prognostications by OPEC are correct, spending cuts by domestic producers and the swift decline in the onshore rig count could signal a drop in U.S. oil production, and by extension associated gas, by the end of the year, the organization said Monday.

According to analysts at Raymond James, the risk in such a scenario is that the current focus on storage for building crude oil is misplaced. The broader global landscape "indicates that we should have plenty of places to store the surging oil supplies," but the analysts' concern is the continued upward march of already record-high U.S. oil inventories may lead to a "psychological trading-related selloff in the coming months."

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