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Physical NatGas Swoons, But Futures Keep Hangin' On

Just as Monday physical natural gas trading saw a near-40 cent rise in Tuesday deliveries, Wednesday packages took just over a 30-cent hit as a trifecta of moderating temperatures, soft next-day power pricing and decreasing forecast power loads made incremental purchases of next-day gas unattractive.

Nearly every point followed by NGI retreated, with most points outside the volatile Northeast seeing declines of about a dime. The NGI National Spot Gas Average fell 29 cents to $2.42, and the Northeast was off $1 on average. Futures were able to maintain recent gains and after a weak open February settled just nine-tenths of a cent lower at $2.325 and March eased four-tenths of a cent to $2.346. February crude oil continued lower, dropping 79 cents to $35.97/bbl.

In spite of the relatively strong performance by futures, analysts are operating under the assumption that warmer revisions to longer-dated weather forecasts will ultimately pressure prices...again.

Teri Viswanath, director of natural gas strategy at BNP Paribas, sees "expectations of a return to a signature El Nino pattern resurfac[ing] inventory concerns.

"Overall, there were somewhat mixed messages in the updated weather model runs, with slightly colder near-term changes offset by the warmer pattern re-emerging in the 11-15 day period. To be sure, a return to a warm-East pattern is now favored before month-end. The main driver is the relatively aggressive deterioration of the current Alaskan ridge in the models, enabling the 11-15 day composite map this morning to feature more normal temperatures or the absence of 'blue' shading."

Viswanath is looking for an inventory pull to be reported this week in the 100 to 105 Bcf range, well below average, but for next week she sees "destocking is accelerating with a draw closer to 180 Bcf likely to occur. While the string of triple-digit withdrawals is reassuring, it should be noted that the average weekly drawdown during January and February stands at 158 Bcf. Consequently, the return to warmer weather ahead poses a continued threat of high end-of-winter inventories, suggesting that the recent recovery in prices might prove short-lived."

Forecasters Tuesday see a mixed pattern, but beyond the six- to 10-day period, weather models are again calling for a return of El-Nino-driven warmth. "[Tuesday's] forecast is somewhat of a mixed message as much of the U.S. sees colder changes for next week's cold air outbreak and then we see stronger support for significant pattern moderation as a warm Nino-forced pattern takes hold again," said Commodity Weather Group in its Tuesday morning report to clients.

"Colder changes for next week are fairly widespread and encompass the West (later six-10 day), the South, Midwest and East Coast (with some faster cold front timing) as an impressive high pressure area drops southward. This event still looks like a 'one-off' as the models continue to trend toward breaking down the western to Alaska ridging pattern to allow a warmer Pacific flow to take hold once more," said Matt Rogers, president of the firm.

Natural gas Monday for the most part avoided the turbulence in financial markets, and analysts don't see much market movement pending significant weather shifts or unexpected storage data. "The natural gas market provided a sea of calm amid extreme volatility seen across the rest of the financial and commodity spaces," said Jim Ritterbusch of Ritterbusch and Associates in closing comments to clients Tuesday. "The fact that the gas is largely a domestic market contributed to today's comparatively tight trading range and negligible price change. Furthermore, most short-term temperature views that now stretch out to about the 18th of this month failed to show much of a shift from last Thursday.

"The first major cold air of the season that is expected to envelop most of the country next week has been largely priced in. So short of major changes in the weather forecasts or a shocker out of Thursday's EIA report, we see this market easily drifting into a consolidation phase within about the 2.20-2.40 zone through the rest of this week. We are still inclined toward the bearish side of this market, but we will continue to await possible advances into the 2.40-2.50 zone before probing the short side."

In physical market trading deliveries to both the Algonquin Citygate and Tenn Zone 6 200L dropped by multiple dollars, albeit on light volume and in a soft power pricing environment. Intercontinental Exchange reported that on-peak power at ISO New England's Massachusetts Hub fell $4.83 to $57.79/MWh and Wednesday power at the PJM West terminal fell $6.30 to $36.76/MWh.

Deliveries to Algonquin Citygate skidded $2.35 to $5.57, and gas on Tenn Zone 6 200L fell $3.31 to $4.63.

At Iroquois, Waddington, trading was active with close to a half Bcf changing hands. Next-day deliveries fell $1.01 to $3.06.

"Temperature sensitivity is a big part of it. You have LDCs telling the retail shippers what the demand is going to be. If you are anticipating average temperatures for the month and temperatures are higher than normal, then you have to get rid of the gas," said an industry pipeline veteran.

Forecaster Wunderground.com predicted that Boston's Tuesday high of 25 degrees would rise to 40 Wednesday and reach 43 on Thursday. The normal high in Boston this time of year is 36. New York City's Tuesday high of 31 was anticipated to jump to 41 Wednesday and climb to 45 Thursday, 7 degrees above normal.

Major market trading hubs also weakened. Gas at the Henry Hub retreated 7 cents to $2.32, and deliveries to the Chicago Citygate fell 12 cents to $2.36. Gas at Opal came in 7 cents lower at $2.41, and packages on El Paso Permian changed hands 9 cents lower at $2.29.

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