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Serene Cash Market In Sharp Contrast To Free-Falling Futures; November Drops 22 Cents

The physical natural gas market for next-day deliveries was mostly steady Monday, but futures trading grabbed center stage as traders digested a second round of weather forecasts calling for near-term warmth.

Prices fell hard and fell often, and the futures market not only opened with a dime loss, but the selling compounded throughout the session, leaving any bulls still standing dazed and confused. Physical trading was divided between $1+ gains in the Northeast resulting from severe pipeline constraints at the bulk of market points, which added anywhere from a few pennies, to losses of as much as a dime. The NGI National Spot Gas Average slipped a penny to $2.22. At the close of futures trading November had plunged 22.4 cents to $2.062 and December had shed 14.0 cents to $2.353. December crude oil fell 62 cents to $43.98/bbl.

"When the market couldn't make it above $2.40 to $2.50, you had to look to the downside," a New York floor trader told NGI. "I got short and we are looking for the market to hold $1.95 to $2.00.

"I think the market has a big rally ahead of it, and it shook out a lot of longs and some shorts that wanted to make a few dollars. Look for it to creep back up."

The trader hedged his bets with the assertion that "If we get under $1.95, there are no numbers to really go by. It could hit $1.70, but I don't think it's going to do that. You have support at $2, and $1.95. Under that, forget it. It's gone."

He added that if he were going to go short the market from this point, he would place a buy stop at $2.10 to limit risk on the trade.

Market technicians see conditions in place for an eventual end to the selling, but not without further price erosion. "Almost every single major market low with the exception of one in the entire history of natural gas has been part of a double bottom," said Walter Zimmermann, vice president at United ICAP.

"I have $1.88 as an Elliott Wave target, but it’s close enough to $1.902 [April 2012] to be a potential double bottom.

"My bullish case for natural gas is not that somehow we don't get to $1.88. My bullish case is that we hold $1.88.

"The bearish case is that if we break $1.88, then I have room down to $1."

From a fundamental standpoint, traders had just about all the bearish weather forecasts they could handle. Friday's 10-cent drop in the November contract was predicated on a milder temperature forecast and overnight [weekend] forecasts turned sharply warmer over key energy markets. WSI Corp. in its Monday morning outlook said, "[Monday's] six-10 day period forecast calls for the expansion of above-average warmth and is notably warmer than Friday's forecast over a good portion of the central and eastern U.S. The western U.S. is much cooler. As a result, GWHDDs plummeted 13.8 to 48 for the CONUS. Forecast confidence has improved since last week and can be considered a little above average for a change.

"Medium-range models are in good agreement with the evolution and progression of the pattern, which is aided by a lack of tropical activity. There is a slight downside risk across the majority of the West and even the northern Plains by the end of the period. The southern U.S. might run even warmer."

Risk managers have their buy objective in focus. "Natural gas closed the week sharply lower and at levels not seen since 2012. Natural gas continues to be pressured by moderate temperatures, mediocre demand and more than adequate supplies," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm, in a weekend report to clients. "Also putting pressure on the gas market has been aggressive hedge selling in the deferred contracts as they started to break the $3.00 level.

"As we look forward to the heat[ing] season, which can often be supportive to the gas market, demand expectations have been ratcheted lower because of the El Nino, [and] on a trade basis, we have been looking for an opportunity to get long the natural gas market, but have not felt like we have yet reached the bottom of this move. We would start to be a light buyer if January reaches the $2.50 level."

January futures settled Friday at $2.632 and Monday at $2.515.

By contrast, the physical market was a bastion of tranquility as a sluggish next-day power market throttled any outsized price moves. Intercontinental Exchange reported that next-day power into the ISO New England's Massachusetts Hub rose $2.00 to $32.25/MWh and at the PJM West Hub next-day on-peak power eased $3.25 to $35.05/MWh. In the Midwest next-day power at the Indiana Hub (formerly Cinergy) rose $2.00 to $32.25/MWh.

Super-sized moves were recorded in New England as Algonquin Gas Transmission reported ongoing flow constraints and deliveries to the Algonquin Citygate jumped $1.37 to $6.55 and gas at Iroquois, Waddington added 16 cents to $3.03. Parcels on Tenn Zone 6 200L jumped $1.63 to $6.00.

Major Hubs were mixed. Gas at the Henry Hub shed 13 cents to $2.14, while gas at the Chicago Citygate added a penny to $2.31. Deliveries to Opal added 2 cents to $2.04, and gas at the PG&E Citygate slipped 7 cents to $2.68.

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