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Traders Rethinking Storage; April Called A Penny Lower

April natural gas is expected to open a penny lower Wednesday morning at $2.78 as traders factor in a slight warming trend and recalculate storage. Overnight oil markets rose.

WSI Corp. in its Wednesday morning six- to 10-day outlook said the "period forecast is warmer than the past forecast over the southern and eastern U.S., especially the Southeast. The Northwest and north-central U.S. is a bit cooler. This is due in part to the day shift. Period GWHDDs dropped another 3.8 to 62.6 for the CONUS. Forecast confidence is considered average at best. Medium-range models continue to display key technical differences with the pattern and potential phasing of disturbances over the East."

Analysts are rethinking the weather-storage dynamic and sense that in the short run there may be more room for storage than previously anticipated. "[T]he latest model run featured colder changes from late next week through the start of the week of April 6th, leading to net colder changes overall," said Teri Viswanath, director of commodity strategy at BNP Paribas, in a Tuesday note to clients. "While [Monday] morning the models were leaning toward a faster shift toward a warmer pattern at the start of April, it now appears that the spring-time warm-up has been delayed to mid-April.

"While the industry will likely report the first net injection for the season for the week ending March 20th, this prospect of lingering heating demand in April suggests a slower start to the injection season. With ostensibly more room to accommodate surplus supplies, traders appear to be having second thoughts about the injection season ahead. Having said this, based on the continued strong production receipts on the pipelines, we are less convinced that surplus production can be easily managed this summer. For the week ending March 20th, interstate pipeline receipts suggest that Appalachia gas production is still within 0.3 Bcf/d of the all-time high recorded at the end of December.

"Based on the unanticipated surge in supply over the winter, we now see an even greater need for accommodation in the upcoming low-demand summer months. This much-needed adjustment, however, will probably not be achieved by a reduction in supply. Despite the steep year-to-date decline in gas-directed rigs and announced curtailments from the Marcellus, we expect that domestic production will increase more than 1 Bcf/d this summer from the recent record winter-time volumes.

"The two primary drivers spurring growth include the backlog of wells that have been drilled but not yet completed, and the increase in drilling efficiency. And despite yesterday's announcement by Chesapeake Energy Corp., that the company would significantly reduce the number of gross operated wells brought online this year, we see little follow-thru from other producers in the region to suggest an imminent decline in production."

Tom Saal, vice president at INTL FC Stone in Miami, in his work with Market Profile notes that the mode price on the monthly distribution comes in at $2.802. "Note the $2.802 mode, or most popular price; the last time the market traded in this range around March 2012. Buyers be ready," he said in a morning note to clients.

In overnight Globex trading May crude oil rose 27 cents to $47.78/bbl and May RBOB gasoline gained 3 cents to $1.8228/gal.

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