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NatGas Cash Gains, Futures Steady as Southbound Cold Weather Struggles

Physical natural gas for Thursday delivery managed a small advance in Wednesday's trading as gains in California, the Rockies and the Midcontinent more than made up for losses in the Northeast. Temperature forecasts continue to be the 800-pound gorilla in the room, and by Friday highs in both New York and Chicago are expected to be more than 15 degrees above normal.

Futures were able to hold steady as traders see an Energy Information Administration storage report due on Thursday in line with historical norms. At the close, January had eased eight-tenths of a cent to $2.062 and February was off 1.0 cent to $2.117. January crude oil fell 35 cents to $37.16/bbl.

Despite a phalanx of forecasts calling for mild temperatures not only this week but out to Christmas, next-day prices in the Midwest and along the REX Zone 3 expansion rose. Forecaster Wunderground.com predicted the high of 54 in Chicago on Wednesday would rise to 57 Thursday and back to 54 Friday, a stout 17 degrees above normal. New York City's high Wednesday of 55 was seen climbing to 59 Thursday and to 61 by Friday, 16 degrees above normal.

Gas at the Chicago Citygates was seen 4 cents higher at $2.04, and packages at the REX Zone 3 interconnect with NGPL at Moultrie County, IL gained 4 cents to $1.96. Deliveries to REX Zone 3 at Putnam County, IN to Panhandle Eastern Pipeline added 2 cents to $1.96. Gas at Lebanon, OH was quoted 3 cents higher at $1.96.

In spite of Wednesday’s gains along the REX Zone 3 Expansion, the trend toward ever-converging prices with points upstream in the Marcellus was unmistakable. The plot above shows NGI's Marcellus SW PA/WV and NGI's Daily REX in Moultrie County, IL. The east to west expansion of REX Zone 3 began Aug. 1 and, according to NGI figures, the differential was 95 cents. By Dec. 9 that had narrowed to 55 cents.

Some see the east-west REX gas having an impact as far west as the Rockies.

"I don't think the gas will actually go to the Rockies, but I think it will force the Rockies gas to find another home," said a Houston-based industry veteran. "I think it could put Rockies gas in something of a price funk like it used to be. That's in the cards when some of these pipes get built.”

Outside the Northeast prices firmed. At the Henry Hub, gas was seen at $2.00, up 2 cents, and deliveries to El Paso Permian gained 12 cents to $1.96. Deliveries to PG&E Citygate changed hands 6 cents higher at $2.57.

Although January futures nearly breached $2 on Wednesday, traders were suggesting the $2.014 posted by January in Tuesday's trading is a seasonal low. "I want to stick my neck out and call the $2.014 a seasonal low, but I am going to wait for confirmation after Thursday's number (volatility can bite), but I am reasonably confident that it is,” said ICAP Energy Vice President Drew Wozniak. He said he felt “like a buyer of forward/back spreads. [I'm] turning mildly bullish.

Wozniak pointed to bearish sentiment in the form of $2 January put open interest, the highest of put strike prices at 6,153 contracts. "We have seen a little lift” following Tuesday’s $2.014 low, he said.

Forecasters are not optimistic that near-term weather is going to have much of an impact on demand. The arrival of meaningful cold depends on the ability of weather systems to tap into cold Canadian air and drive it south into major U.S. markets. Forecasters can't really say with any certainty that is in the cards.

Natgasweather.com said to not expect much for the next five days, but "stronger pushes of colder northern latitude air spreads across the country from west to east beginning Friday. Specifically, much of the country will remain plus-15-25 degrees F warmer than normal besides the West Coast.

“This will be followed by increasing natgas demand late this weekend as strong Pacific weather systems with rain and snow sweep through the interior West and then gradually into the central U.S. by early next week, including deep into Texas. Cooling will gradually reach the East as next week progresses to bring stronger demand,” forecasters said.

"How much each weather system tracking across the northern U.S. taps remains uncertain and is the primary cause of major weather model struggles. There are still plenty of ways the pattern plays out quite cold as we approach the official start of winter (Dec. 22), although the weather data isn't convincing as it needs to be with the weather models continuing to produce wildly varying solutions from one run to the next, but with an overall theme stronger natgas demand is coming."

The failure of any significant cold to materialize has analysts recalculating supplies. Citi Futures Perspective’s Tim Evans and many in the industry expect a pull of about 65 Bcf from storage for the week ended Dec. 4, but the surplus going forward is expected to build.

The year-on-five-year average surplus "that was 247 Bcf as of Nov. 27 would expand to 401 Bcf as of Dec. 18 before declining to 376 Bcf as of Dec. 25,” Evans said Tuesday. “This overall increase in the storage surplus confirms the market is becoming better supplied on a seasonally adjusted level. A rising surplus can be thought of as downward fundamental pressure on prices, or at least a headwind for any price recovery.”

Price recovery? Some say it isn't even close to becoming a reality any time soon. The bear markets “don't end when the losers outnumber the winners and they don't end when the point of maximum assumed pain is reached," United Energy’s Walter Zimmermann told NGI Tuesday. "They end when chart patterns are completed to the downside, and that always seems to exceed by decisive margins rational expectations of what is possible on the downside.

"That is what crude oil is going through right now, and gasoil, and diesel, and natural gas through guilt by association. I think natural gas left to its own devices would just be sitting here not doing much of anything."

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