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Production, Storage, Technicals Have Traders Expecting Up To 20-Cent NatGas August Futures Decline

Physical natural gas for Wednesday delivery inched lower in Tuesday's trading with widespread losses of a few pennies to as much as a dime common at many trading points. Eastern points took double-digit hits as power markets were mixed, and major Hubs declined up to a nickel.

Overall, NGI’s National Spot Gas Average was down 5 cents to $2.45. Natural gas futures also skidded lower as traders turned their attention to not only what looks to be an outsized storage injection later in the week, but also surging production and a deteriorating technical picture. At the close August was down 4 cents to $2.716 and September was off 4 cents as well to $2.726. August crude oil settled down from Monday's chaos and shed 20 cents to $52.33 after dropping over $4 Monday.

At eastern points prices softened as power loads were steady and showed no signs of significant increases. ISO New England forecast that Tuesday's peak power load of 21,020 MW would rise moderately o 21,810 MW Wednesday before sliding to 18,210 MW Thursday. The New York ISO predicted falling loads with Tuesday's peak load of 26,665 MW falling to 26,169 MW Wednesday and 24,611 MW Thursday.

At the Algonquin Citygates next-day gas was seen at $1.48, down a stout 39 cents and deliveries to Iroquois Waddington came in a penny lower at $2.84. Gas on Tennessee Zone 6 200 L was quoted 23 cents lower at $1.62.

Marcellus points also weakened. Gas on Millennium changed hands 2 cents lower at $1.15 and deliveries to Transco Leidy skidded 9 cents to $1.12. Gas on Tennessee Zone 4 Marcellus changed hands 7 cents lower at $1.06 and packages on Dominion South fell a dime to $1.17.

Prices at major market hubs also fell. Gas at the Henry Hub retreated a penny to $2.73 and deliveries to Chicago Citygate were off 2 cents at $2.70. Deliveries to El Paso Permian added a penny to $2.63, but parcels to PG&E Citygate fell six cents to $3.10.

Gas buyers tasked with procuring near term supplies across the broad PJM footprint will have wind generation at their back as "A cold front will slide across western PJM with a round of heavy showers and thunderstorms. A few storms may be strong. The cold front will continue to sag south and east into the Mid Atlantic with a chance of showers and storms during Wednesday," forecaster WSI Corp. said Tuesday.

"A south to north wind associated with the cold front will lead to a period of modest wind generation [Tuesday] into early Wednesday morning. Output is forecast to out in excess of 2 GW. Wind gen will likely drop off by Wednesday afternoon and become relatively light and variable during the remainder of the forecast period."

Futures only slid 4 cents, but that was enough in the eyes of some to forecast additional declines of as much as 20 cents. "Although today's losses were comparatively modest at less than 4 cents, the breakdown in support to below the $2.73 level was important from our perspective," said Jim Ritterbusch of Ritterbusch and Associates in closing comments Tuesday.

"We feel that this support violation paves the way for a further decline to the $2.50-2.60 zone where we will look to accept profits out of any short holdings. The temperature factor continues to tilt bearish with cool patterns expected to re-emerge across most of the mid-continent within the 6-14 day time frame. Looking ahead to Thursday, our expected 89 Bcf storage injection per the EIA (Energy Information Administration) is likely to fall toward the high side of average street ideas and could trigger additional weakening. We also feel that large speculative entities possess additional ammunition to employ toward the short side of this market based on latest COT guidance. Given today's 1 month lows, we will be looking for the specs to pounce on any inter-day rallies of more than 4-5 cents while rising production will likely be keeping commercials interested in adding to short hedge positions. In sum, lower values of as much as 10-20 cents would appear to lie ahead."

Not only do speculative traders have plenty of bullets, but production data shows output recovering to near-record levels. In a report industry consultant Genscape said "Spring Rock data shows Lower 48 production during the past week has been recovering quickly upon the conclusion of longer-run maintenance events that took place in the Gulf of Mexico and Northeast throughout this summer. Including today's nominations, production this week has been averaging 73.58 Bcf/d, a 0.68 Bcf/d increase from last week and 0.76 Bcf/d increase from the prior 30-day average. On gas day July 3, production hit 74 Bcf/d for the first time since April, when the record high of 74.3 Bcf/d was set."

Weather forecasts changed little overnight. Commodity Weather Group in its Tuesday morning report said, "Overall outlook continues to run very similar to yesterday's with only minor adjustments at times. The cool push in the second half of the six-10 day for the Midwest to East looks a bit weaker today, so we softened it somewhat for a slight [energy] demand gain impact."

Market technicians see the market as perilously close to initiating a move lower but admit that for the moment, the trend remains sideways. "Typically, from mid May to mid August we are looking for seasonal weakness in natural gas," said Brian LaRose, a market technician with United ICAP. "So we would not be surprised to see a continued move lower over the short term. However, to trigger a short-term slide, bears need to take out $2.708. [We] see room down to $2.641-2.616, possibly even $2.490-2.406 if the bears are successful. As long as natural gas can hold $2.708, the bias is sideways to higher," he said in closing comments to clients Monday.

Tom Saal, vice president at FC Stone Latin America LLC, said the "market still range bound (near the lower end) and weather-driven for now...Also keep your eye on forward curve as it relates to the injection season and pricing available 'empty' storage." In his work with Market Profile, Saal expects the market to test Monday's value area at $2.775 to $2.757 before moving on and testing $2.875 to $2.831.

Giving market bulls perhaps some solace, the EIA on Tuesday in its Short-Term Energy Outlook (STEO) said it thinks the Henry Hub 2015 average will be $2.97, which is unchanged from the previous STEO after months of downward revisions (see related story).

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