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REX Reversal To Crush Midwest Basis? Futures Drop 3 Cents

Next-day gas fell hard and fell often in Wednesday's trading as temperatures Thursday in major Midwest markets were expected to moderate considerably while eastern markets were seen backing off of early-week readings in the high 80s to low 90s.

Chilly temperatures, below 50 in some regions, were expected to rise by 20 degrees in the Great Lakes, and the overall national physical gas market fell 11 cents to average $2.73. Midwest and Midcontinent points fell by double digits, and losses of just under a dime were common elsewhere.

June futures did another head fake by opening strong, but ending the day lower. At the close, June was off 3.3 cents to $2.915, and July was lower by 3.2 cents to $2.959. July crude oil added 99 cents to $58.98/bbl.

Analysts see production growth and increased electrical power generation requirements balancing each other out, which may impact storage inventories.

"With incremental weather-related demand now augmenting the ongoing fuel-switching, electric power demand has mostly offset domestic production growth, curbing the weekly build in inventories," said BNP Paribas analyst Teri Viswanath, who directs natural gas strategy.

"The weather models continue to feature above-normal temperatures in the East, mirroring the sort of weather pattern that occurred last year when the eastern seaboard recorded the top twenty warmest observations in 120 years,” she said. “Based on our analysis, the daily facility inflows suggest a 95 Bcf build for the week ending May 15, a level that falls far short of last year's 106 Bcf injection.

“If verified, last week's build would mark the first time this season that the storage injections have lagged year-ago levels. Thereafter, this trend (of weekly injections lagging behind last year) will likely continue as significant growth in the electric power demand sector limits restocking. Indeed, we expect that the industry will stock away 105 Bcf for the week ending May 22 and 115 Bcf for the week ending May 29, or a pace that falls short of last year's 113 Bcf and 118 Bcf build, respectively.

"With the weather now limiting the industry's restocking effort, traders appear to be having second thoughts about the ongoing need for excessive price-induced fuel-switching this season."

Other estimates of Thursday's Energy Information Administration's (EIA) 10:30 a.m. EDT report include IAF advisors with a 98 Bcf estimate and Genscape Inc. calling for a 99 Bcf build. A Reuters survey of 22 traders and analysts revealed an average 97 Bcf average with a range of 90 Bcf to 107 Bcf. Early Reuters polling for the week ended May 22 showed a range of 92 Bcf to 104 Bcf with a 97 Bcf average.

Tim Evans of Citi Futures Perspective saw Tuesday's rise and fall as the result of "short-term technical factors, with a bout of early short-covering followed by profit-taking from short-term bulls afraid they may have missed the peak. The market became more volatile, [although] there doesn't seem to be much change in the midday weather update."

Evans is looking for a 95 Bcf build in the EIA report and has tempered his forecasts for weeks further out. By June 5, his calculations show the year-on-five-year deficit having flipped to a surplus of 14 Bcf.

"Although this still confirms some easing of supplies on a seasonally adjusted basis, we do note it is less of a weight on prices than a day ago or a week ago. We think the market may still have a chance to collect itself and work toward the $3.25 mark we've been anticipating, but Tuesday's volatility does warn that the recent uptrend has become unstable."

In physical trading, there may be an opportunity to take advantage of collapsing Chicago Citygate and Midwest basis. Genscape reported that the Rockies Express Pipeline (REX)  reversal project “is expected to be completed next month. The reversal will create an incremental 1,200 MMcf/d of east-to-west flow capacity, adding to the existing 600 MMcf/d capacity.

“This reversal will allow Appalachian gas to reach Midwestern markets via interconnects with NGPL, ANR, Midwestern GT, Panhandle and Trunkline. At present, Genscape does not expect Midwest demand will grow rapidly enough to absorb this influx of gas. Thus, the arrival of this gas is expected to essentially displace incumbent supplies."

Quotes for next-day delivery in the Midwest plunged on expectations of lower temperatures. Wunderground.com predicted the 49 degree high on Wednesday in Chicago would jump to a pleasant 69 Thursday and fall back to 57 Friday. The normal high in Chicago is 72. Milwaukee, WI was expected to see a similar pattern, with Wednesday's high of 49 jumping to 69 Thursday and then easing to 57 Friday. The normal high in late May is 72.

Gas on Alliance for Thursday tumbled 12 cents to $3.01, and deliveries to the Chicago Citygate were down 12 cents to $3.01. On Consumers, gas was quoted at $3.09, down 11 cents, and parcels on Michcon came in 9 cents lower at $3.09. Deliveries to Northern Natural Ventura fell 14 cents to $2.91.

Gulf quotes were also weak. Gas on Transco Zone 3 fell 10 cents to $2.99, and at the Henry Hub, next-day packages were seen at $2.99, down 8 cents. On ANR SE, Thursday gas changed hands at $2.95, down 10 cents, and at Katy, gas was quoted at $2.96, down 10 cents.

According to Wunderground.com, "Disorganized showers and thunderstorms will also develop along a stalled-out frontal boundary extending across the Southeast. Scattered rain and high-elevation snow will trail this system over the central and northern Rockies on Wednesday.

"Meanwhile, cool, dry conditions will spread across the upper Midwest, the Great Lakes and the Northeast as a cold front slides eastward over the western Pacific. Temperatures will be 10-15 degrees below normal over the region."

The National Weather Service (NWS) forecasts below-normal heating and cooling requirements for major markets. For the week ended May 23, NWS predicts New England will see a combined 41 total heating and cooling degree days (DD), or 15 below normal. New York, New Jersey and Pennsylvania are expected to experience 36 DD, or 11 below normal, and the Greater Midwest from Ohio to Wisconsin is anticipated to endure 53 DD, or six below normal.

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