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It's Hot and Getting Hotter: Physical NatGas Jumps, But Futures Flub

All eyes were on the thermometer Monday as traders for next-day gas laid in supplies to get them through what is forecast to be a brutal stretch of hot weather. Next-day deliveries bounded higher with the Northeast, Rockies and California taking the lead, with some gains averaging close to 40 cents.

Appalachia found it hard to keep pace due to the temporary shut down of a major west to east carrier, and the NGI National Spot Gas Average rose a stout 15 cents to $2.57. Futures trading was uninspired and had none of the luster of the physical market.

At the close, August was lower by 3.4 cents to $2.722, and September was down 3.6 cents to $2.692. August crude oil fell 71 cents to $45.24/bbl.

Shippers of gas out of the Marcellus were out of luck Monday as the shutdown of a good portion of the REX Zone 3 Expansion was set to begin Tuesday, impacting flows west out of Ohio until next Monday (July 25).

"The scheduled Zone 3 compressor station tie-in work is set to begin on gas day July 19 and last through July 25," said industry consultant Genscape Inc. in a morning report. "During this time REX will be unable to flow westbound gas past the Columbia Gas-Fairfield interconnect in Ohio; typically, nearly 1.8 Bcf/d flows past this point.

"Some gas will be delivered upstream of the Fairfield point, and some can make its way onto DTI and Tetco, but the area is heavily constrained. Therefore, it is probable that the majority of the eastern Ohio production, which normally flows west on REX, will need to be shut-in."

Prices for next-day delivery at Marcellus points languished. Gas on Tennessee Zone 4 313 Pool fell 6 cents to $1.45, but gas on Tennessee Zone 4 Marcellus added 4 cents to $1.32. Gas on Transco-Leidy Line rose 2 cents to $1.40.

REX might be able to fulfill delivery obligations with gas sourced from the West, but that gets a little complicated too.

"It is likely that REX flows from the Rockies will increase during the outage to compensate for the lack of gas from the east; however, REX has a planned 1-day, pig run scheduled for Thursday (July 21) from the Blue Mound, IL to Bainbridge, IN compressor stations," Genscape said.

“The pig run will limit flows through the Blue Mound compressor station to 1,339 MMBtu/d. Flows generally only exceed this limit by 100-200 MMcf/d. However, the interconnects with NGPL, PEPL, ANR, Midwestern and Trunkline are normally fed by nearly 1.2 Bcf/d from the west and 1.3 Bcf/d from the east.

"Since this pigging coincides with the tie-in work, no gas will be flowing from the east, and west flows won't be able to increase on Thursday to compensate. As a result, it is anticipated that these five interconnects will be at least 1.3 Bcf/d short on Thursday."

Gas at Indiana and Illinois delivery points on REX bounded higher along with the rest of the market. Deliveries to ANR at Shelby County, IN changed hands 17 cents higher at $2.74, and gas on Panhandle Eastern at Putnam County, IN added 18 cents to $2.75. Deliveries to NGPL at Moultrie County, IL were quoted 19 cents higher at $2.75.

Major market centers outside the Marcellus posted double-digit gains. Gas on Dominion South rose 2 cents to $1.36, but packages at the Chicago Citygate gained 19 cents to $2.82. At the Henry Hub, next-day deliveries rose 14 cents to $2.81, and gas on PG&E Citygate surged 16 cents to $3.03.

Major heat is expected to bake the country's mid-section.

"The central United States is facing a stretch of dangerous conditions this week as multiple days of triple-digit heat unfolds," said AccuWeather.com meteorologists.

"While heat from the southern Plains will expand northward early in the week, the second half of the week will yield the hottest weather so far this summer to the entire central U.S. A strong area of high pressure will settle over the Plains and cause many locations to have sizzling temperatures," AccuWeather’s Rob Richards said.

"Places like Oklahoma City; Wichita, KS; and Omaha will be about 5-10 degrees above average during the Wednesday through Sunday timeframe," [and] Rapid City and Pierre, SD; Little Rock, AR; Pueblo, CO; Dallas and Lubbock, TX; and Shreveport, LA, will join these cities in enduring one or more 100-degree days."

Several cities "could pass new record highs," said AccuWeather meteorologist Kristina Pydynowski. “As the heat shifts toward the East Coast late this week, St. Louis and Memphis, Tennessee, could see triple-digit heat."

The National Weather Service (NWS), not surprisingly, is predicting well above normal cooling loads for major markets. NWS said for the week ended Saturday (July 23), it is expecting New England to swelter under 74 cooling degree days (CDD) or 30 more than normal. The Mid-Atlantic is anticipated to see 76 CDD or 17 above its normal accumulation, while the greater Midwest from Ohio to Wisconsin is forecast to see 90 CDD or 32 more than normal.

Longer term, weather forecasters see temperatures a scooch cooler than previously forecast, but well above average.

"Near to above average warmth is expected to persist over a good portion of the nation," said WSI Corp. in its Monday morning 11-15-day outlook. Except for the southwestern part of the country, the forecast was cooler than Friday's forecast for days 11-12.

Continental U.S. population-weighted CDDs "are down one for those two days and are now forecast to be 68.8 for the period. This is 13.9 CDDs higher than average,” WSI said.

Forecast confidence was "only average" Monday. "There is modest model support for the general pattern, but spread with the amplitude of the flow and magnitude of temperatures, especially over the West. The likely retrogression of the pattern supports an upside risk across portions of the West, especially the Pacific Northwest and California," given the Global Forecast System operational model. "Texas and the southern U.S. have some downside risk due to potential wet weather.

Risk managers see the market focusing on temperature dynamics to the exclusion of most other factors.

"The market shrugged off the [storage] news as market participants looked forward to the warmer than normal temperatures that will be covering much of the U.S. next week," said DEVO Capital Management President Mike DeVooght.

"On a trading basis, now that we have seen the short covering rally we thought was possible, we feel current levels represent attractive levels for producers to start to establish forward sales. But since we are not that bearish, we would establish hedges with either floors or collars (with a ceiling as close to $4 as possible)," DeVooght said in a weekend note to clients.

He recommended that trading accounts and end users stand aside while physical market longs "hold an Aug. 16-July 17  $2.70 put and short a $3.50 call at flat or hold a $2.75 put and short a $3.75 call paying 7 cents."

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