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Cash, Futures Mark Time as Record-Ending Inventories In Sight

Physical gas prices for Tuesday delivery moved little in Monday's trading. Small gains in the Gulf and West were offset by losses of only a penny or two at market centers in the East and Midwest.

Overall, the market was up two cents at $2.56 as temperature changes across the nation came in close to seasonal norms. Futures trading was similarly uninspired with the spot May contract limited to a trading range of just 6 cents. At the close, May had added 0.5 cent to $2.644 and June had added 0.6 cent to $2.694. May crude oil shed 19 cents to $48.68/bbl.

In New England, next-day prices were widely mixed as temperature forecasts showed a volatile pattern and peak power prices jumped. AccuWeather.com forecast that Boston's Monday high of 42 would rise to 47 Tuesday but slide back to 43 on Wednesday, 7 degrees below the seasonal norm. Intercontinental Exchange reported that peak power Tuesday at the ISO New England's Massachusetts Hub jumped $23.89 to $66.13/MWh.

At the Algonquin Citygates, next-day deliveries were seen at $9.24, up 30 cents, and gas into Iroquois Waddington shed 13 cents to $3.01. On Tennessee Zone 6 200 L, gas changed hands at $7.75, down 10 cents.

To the West next-day gas moved little as peak next-day power declined and temperatures were forecast to trend above normal. AccuWeather.com predicted Monday's high in Chicago of 60 would slump to 50 Tuesday before climbing back to 60 on Wednesday. Chicago’s normal high in late March is 52. Intercontinental Exchange reported that peak power for Tuesday delivery at the PJM West terminal fell $7.01 to $36.41/MWh.

Gas on Alliance shed 3 cents to $2.63, and deliveries to the Chicago Citygates was 4 cents lower at $2.59. Gas on Consumers was unchanged at $2.77, and deliveries to Michcon eased a penny to $2.75.

Tuesday power loads were forecast to decline. The New York ISO predicted peak load Monday of 19,404 MW would slide to 19,124 MW Tuesday and reach 18,951 MW Wednesday. PJM said peak load Monday of 35,268 MW is expected to decline to 34,211 MW Tuesday before inching up to 34,751 MW Wednesday.

At Gulf points, next-day gas was mostly lower. Tuesday parcels on ANR SE shed 2 cents to $2.57, and Henry Hub fell 2 cents to $2.61. Gas on Columbia Gulf Mainline was quoted flat at $2.56, and gas at Katy rose 4 cents to $2.57.

Analysts consider the $2.590 settlement of the April contract to accurately represent a well supplied if not overburdened market. "We feel that level accurately reflects the potential for this April's supply/demand balance to be the loosest since April 2012," reported industry consultant Genscape Inc.

Genscape expects that by the end of the injection season inventories should be a plump 3,988 Bcf, a record, surpassing the 3,929 Bcf reached in October 2012.

"This is due in part to a loose April,” said Genscape analysts. “For April, we expect the market to run long supply by about 8.37 Bcf/d. If realized, that would be the largest surplus in April since at least 2007. Last April the market was long an average 4.76 Bcf/d. Prior to that the record was in 2010 at 6.02 Bcf/d.

"The length is primarily a product of our expectation of production running at 73.59 Bc/d, a 5.62 Bcf/d increase over last April. Analysts said it would also be the largest monthly year-over-year (y/y) gain and after April, the monthly y/y growth diminishes as production slows on weaker commodity prices.

“The length is also a product of anticipated y/y demand increases not hitting the market until later,” said the Genscape team. “While we anticipate April demand will run about 1.8 Bcf/d above April 2014, the larger monthly y/y increases don't start kicking in until May and beyond due to coal plant retirements and weak hydro out west. Similarly, we don't see exports to Mexico registering large monthly y/y gains until June. For April we expect 0.25 Bcf/d of y/y growth, but by June that number nearly doubles."

If the market is as well supplied as Genscape analysts predict, futures traders will likely see a test of current support levels. "If it settles a couple of days below $2.50, that would be a bearish sign, and I don't see any potential to move higher,” said a New York floor trader. “We only traded 59,000 contracts [by the close] in the May contract, and that is light. $2.50 is support underneath and $2.75 is not as strong a resistance number up above.”

Forecasters see widely varying weather conditions going forward but nothing likely to have a major impact on supply-demand balances. "We continue to track a challenging pattern dynamic as strong cold air supply resides across central to eastern Canada, but active influences from the Pacific prevent much of it from getting into the U.S," said Commodity Weather Group President Matt Rogers in the firm's Monday morning report.

The changes are mixed on Monday, said Rogers, but the firm’s team sees “more lower demand than higher demand adjustments compared to Friday's forecast. Some cooler changes midweek on the East Coast are offset by warmer changes late this week into the start of the weekend. More widespread warmer changes across the South next week also offset some cooler changes there this coming weekend.

“The 11-15 day is not as warm as forecast [Sunday] across the Midwest, East and South, but the pattern still navigates toward that warmer look as the models show some marginal western cooling. Risks are generally to the warmer side for the middle third of April with some chance to shift back cooler again late in the month."

Analysts can't seem to put on their bear suits fast enough. Steve Mosley, publisher of SMC Natural Gas Price Forecasting and Advisory Services, suggested that prices may be poised to decline from 10-45 cents. The market, he said, “initially tried to resume some upside movement, but it then proceeded to give back all of the previous week's gains. It fell further after a somewhat bearish storage report and made a serious challenge of our Feb. 6 winter seasonal low point of $2.567 in the final minutes of the week as the April contract expired.

“Thus, while a sharp rally like we saw between March 16 and 18 tends to be a good indicator that a winter seasonal decline is complete, it didn't turn out to be so this time. As such, it appears that we may see the market actually break at least somewhat lower here in the waning days of March and actually achieve our $2.20-2.55 winter target range."

Barclay's Commodities Research analyst Michael Cohen is sticking with his lower price regime. "Lingering cold weather has failed to keep natural gas prices supported as the shoulder season begins. Production is rebounding from freeze-offs during the winter and has led to the first net storage injection of the year. As we forecast last month, we maintain our view that prices will fall to average $2.45 over the course of 2Q2015 and will average $2.75 during 2015," he said Monday.

At BMO Capital Markets, analysts have knocked 75 cents off their forecast price. "The 2014-2015 winter heating season proved to be a bust for North American natural gas prices and the outlook for the summer is no better," said analyst Randy Ollenberger. "We are lowering our Henry Hub assumption to $2.75/Mcf from $3.50/Mcf and our 2016 assumption to $3.25/Mcf from $4.00/Mcf. We continue to recommend that investors largely remain on the sidelines over the first half of the year."

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