This year’s unseasonably cool summer in parts of the eastern United States and a natural gas supply glut brought on by the country’s shale production boom are continuing to put downward pressure on natural gas prices, as evidenced by NGI‘s August Bidweek Survey. The national spot gas average for the month dropped 21 cents from July to average $3.45/MMBtu.

While coming in well below the previous month’s average, the August 2013 bidweek national average price still represents a healthy 45-cent premium to the August 2012 bidweek average of $3/MMBtu.

The Northeast region, which is home to both unseasonably cool summer temperatures and a major gas supply boom from shale production, unsurprisingly led all regional losses and was the home of the largest individual market point drops. The region declined 45 cents from July to August bidweek to average $3.22/MMBtu.

Capacity constraints are still the dominating storyline in the region as gas production out of the Marcellus and Utica shales continues to struggle not only to find transportation space, but also a market (see NGI‘s Bidweek, July 1). On Thursday, Williams said it has restricted some natural gas pipeline services on its Transcontinental Gas Pipe Line LLC (Transco) because of capacity constraints in the Pennsylvania portion of the Marcellus Shale. A lack of infrastructure has hindered the pipeline, which has capacity to carry 9.9 Bcf/d to markets across the Northeast and Southeast. However, Transco said it can’t accommodate gas transportation past the 195 station because receipts can’t exceed deliveries north of it.

The continuing bottlenecks in the region were evident in bidweek averages this month, when the Northeast once again claimed the largest individual market point month-to-month drops, all firmly planted in the Marcellus. Transco-Leidy Line dropped $1.36 to average $2.03, while Tennessee Zone 4 Marcellus came off 91 cents to break the $2 price zone at $1.97/MMBtu. Dominion declined by a half dollar to slide below $3 and average $2.94/MMBtu.

Behind the Northeast, nearly every major gas trading region reported double-digit drops. South Texas and South Louisiana were down 26 cents and 25 cents, respectively, to average $3.41/MMBtu and $3.42/MMBtu, while East Texas came off 23 cents to average $3.43/MMBtu. The Midcontinent lightened by 9 cents to average $3.45/MMBtu.

The West this month was home to a number of awards. The Midwest (down 15 cents) and California (down 11 cents) came in with the highest averages of $3.70/MMBtu and $3.62/MMBtu, while the Rocky Mountains joined the Midcontinent as the only major regions not to record double-digit declines for the month. The region dropped 9 cents to average $3.37/MMBtu.

For traders hoping for higher prices in the near-term, the bad news is that the weather is unlikely to cooperate as much of the East is expected to continue to receive a reprieve from normally sweltering summer temperatures. According to Frontier Weather’s six- to 10-day outlook on Thursday, the Pacific Northwest, Texas and Louisiana are expected to see warmer-than- normal conditions, but cooler-than-normal readings are expected to continue to dominate from the northern Plains through the Mid-Atlantic and Northeast. The 11- to 15-day outlook isn’t much better for natural gas price bulls with warmer than normal in the West, cooler than normal for inland portions of the East and normal seasonal conditions along the coasts.

For cues on price direction from the natural gas futures arena, it appears that without any supportive fundamentals on the horizon the trend is still toward lower prices. August futures expired Monday at $3.459/MMBtu, while September futures migrated over the course of the month from a July 1 close of $3.573/MMBtu to a $3.387/MMBtu close on Aug. 1, which was the lowest settle for a front-month contract since mid-February. The country’s storage picture — which saw a bearish 59 Bcf injection Thursday for the week ending July 26 — is not helping price bulls.

“The 59 Bcf in net injections was above the consensus expectation for a 56-57 Bcf build and above the 47 Bcf five-year average as expected, and so a moderately bearish surprise,” said Tim Evans, an analyst with Citi Futures Perspective in New York. “The wider week-to-week swings in recent weeks point to an increased sensitivity to temperatures around the seasonal peak in cooling demand. Forecasts for moderate temperatures point to further robust injections over the next few weeks, putting this bearish report into a larger bearish context. The downside remains open for prices in the absence of a warmer forecast.”

During this month’s five days of bidweek trading, cash traders were being cautious while expecting lower prices than July. “We scaled back a bit on bidweek purchases,” a Michigan marketer toldNGI. “I was looking at what we were buying during July for customers, and to some degree we were adding to people’s storage until it got closer to the end of the month and then we thought we didn’t want to put that much into storage because August may be better prices.”

The marketer added that even with the hot weather during July his company was able to make spot gas purchases at less than July index. “If people are comparing us to the utility, we came in considerably lower than them, almost 50 cents lower.

“We had one customer who said, ‘these are nice low prices, go ahead and fill up my allotment’ and that was before last weekend. We went ahead and bought as much as we could, and then he comes back and says, ‘prices are getting better, what does it look like going forward?’ The customers are Monday-morning quarterbacking.

“Sometimes they will say, ‘go ahead and do a fixed-price purchase.’ They don’t realize that the price is for this month and there is a forward curve. As soon as you point that out, they drop the issue. They will look at the screen and forget that on top of that is the basis, but they have been talking with us for years,” the Michigan marketer added.

As bidweek was drawing to a close, some marketers were thinking that even with the overall weak tone to both futures and cash, index-based bidweek purchases wouldn’t necessarily be scaled back. “It depends on what kind of demand buyers think they will have. If they believe their load is relatively flat and they like the price where it is, they may want to buy 50% or most of it at index,” said a Northeast marketer. “It depends on how much work somebody wants to do on the day…and whether it’s worth it for $10,000 [or so]. Is it worth the difference versus just locking it up? If you get a little out of whack on the day a little bit, then you go out and buy it but not worrying about it every single day.

“You could put your staff into doing something with potential mistakes such as invoicing,” he added. “What’s the downside? Do you have a dime of downside or a potential for $2 on the upside, which is going to create real havoc if you are a buyer if you have to pay up $2 when you could have locked it all up at the beginning of the month.”

The marketer pointed out that if you had done that in New England at the first of July, “you would probably have lost money relative to the first of the month. The market went up quite a bit. A power producer will buy every day, but a manufacturer will buy at index if they feel the demand for their product will be there every day.”

A Houston-based physical gas trader said Wednesday next-day trading was “pretty quiet” and that bidweek business was even more so as most people likely got their business done earlier in the five-day trading window. “Things were pretty slow this bidweek. I think prices are going to come off quite a bit from the previous month, but we’ll have to wait and see.”

One thing the trader said the market needs to keep an eye on is the nearly nonexistent basis between next-day Henry Hub and other locations around the country.

Case in point: The Henry Hub and Transco Zone 6 NY were twins on Wednesday as gas for Thursday delivery at both locations dropped 2 to 3 cents to average $3.46. Chicago Citygate wasn’t too far off with its decline of two pennies to average $3.51, while Algonquin Citygate came off 4 cents to average $3.55.

“There is not a lot of spread value anywhere, is there?” the trader said. “Sell it wherever you’ve got it and just dump it in a pool. Hope you can make a little profit on that, but I don’t know what the long-term answer is. Something has to change here pretty soon, otherwise everybody is going to go out of business and there won’t be anybody to sell gas. The bottom line is there is a lot of gas on this market, and with temperatures in the Northeast cooling off this week, that’s not helping the supply-demand situation. If it stays cool in northeastern markets, things will start backing up everywhere else, creating a domino effect.”

Much like August bidweek pricing revealed, the domino effect from gas backing up could be seen at pricing points located in heavy gas production areas. Tennessee Zone 4 Marcellus on Wednesday for Thursday delivery plunged about 38 cents to average $2.16 as gas supply pooled with no place to go.

At a recent Energy Bar Association luncheon, Rick Porter, director of natural gas regulatory advisory services for Black & Veatch, remarked that the traditional value proposition of pipeline capacity — moving gas to a location where it can be sold for a higher price — has largely evaporated. As basis differentials across the country have been crushed, gas trading shops have closed up and the value of market-area gas storage capacity has declined.

“At some point you’ve got to establish some other intrinsic value in your pipeline capacity beyond basis,” Porter said. “If you’re satisfied with basis as the value of your pipeline capacity, you might as well shut the doors and go home now because there isn’t going to be any basis for a long, long time since you can get gas all over the country, and there’s just no spread.”

In June, Oneok shut down its natural gas marketing business in a nod to the reality of flattened basis spreads and the more challenging gas trading environment. JPMorgan Chase & Co. and Hess Corp. have also recently announced their exits from gas marketing for various reasons.

Despite the unseasonably cool temperatures in the Northeast and New England, the Houston trader told NGI that some U.S. locations were still feeling the heat, thus keeping some demand on the gas market. “It is still warm down here in Houston and in other certain areas of the country,” he said. “However, when that heat disappears, we’ll see some really big changes.”