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California, Midcontinent Pace Cash Gains; Futures Rattle Higher

Natural gas prices in the physical market overall rose an average of 3 cents on Wednesday for Thursday delivery. Nearly all points posted gains of anywhere from a penny to a nickel with the infrastructure-challenged and unpredictable Marcellus Shale locations recording small losses to double-digit gains and Midcontinent and California points coming in with solid gains.

At the close of futures trading September was higher by 5.7 cents to $3.342 and October gained 5.3 cents to $3.365. September crude oil gained 2 cents to $106.85/bbl.

Midwest buyers have been taking advantage of low prices and have stepped up to the plate. "I bought a little gas last week when prices were lower and tried to squeeze it into storage as best I could," said a Nebraska utility buyer. "It looks like everyone is putting in their firm supply and not much room for extra, and Northern is allowing a little overrun every day, but they are maxed out for injections into storage every day."

He added that the power producers were not in the market for peak shaving "because the weather has been really cool. We've only had to peak shave a little in August, just minimal. The peak shavers used quite a bit last month, but I would imagine September requirements would not be overwhelming. We are not making a lot of money off of them. "

Temperatures throughout the nation's mid-section are scheduled to rise but still remain well below normal. AccuWeather.com reported that Chicago's Wednesday high of 72 would rise to 76 on Thursday and reach 78 on Friday. The normal mid-August high in the Windy City is 83. St. Louis' Wednesday high of 77 was predicted to reach 79 on Thursday and 81 on Friday. The normal high in St. Louis this time of year is 88. Omaha was anticipated to see its 80 high on Wednesday ease to 78 on Thursday before rising to 81 on Friday. The seasonal high in Omaha is 86.

Gas for delivery Thursday on Alliance was 4 cents higher at $3.44 and deliveries to the Chicago Citygates added 2 cents to $3.44 as well. Northern Natural Ventura gas for Thursday added 6 cents to $3.38. At Demarcation next-day packages were seen at $3.38, a nickel higher.

Prices in the active Marcellus play were mixed. Deliveries to Transco-Leidy gained about 16 cents to $2.82, but gas on Tennessee Zone 4 Marcellus slipped 2 cents to $2.62.

Next-day gas prices in California rose as Thursday peak power prices gained traction. IntercontinentalExchange reported that next-day peak power at SP-15 rose $1.84 to $46.90/MWh and parcels to NP-15 added 33 cents to $41.52/MWh. At Four Corners, power for delivery Thursday gained $3.13 to $43.63/MWh and at Palo Verde peak Thursday power gained $1.62 to $39.46/MWh.

Gas for Thursday delivery at PG&E citygates was quoted a nickel higher at $3.66, and deliveries to SoCal Citygates rose by 4 cents to $3.55. Deliveries to SoCal Border points also added 4 cents to $3.46, as did El Paso S Mainline Thursday parcels, 4 cents higher at $3.48.

Futures traders see a plethora of nervous shorts in the market adding to upside pressure. "I thought we were going to go back down, but there seem to be too many shorts to come back off. Any time you get a spike it seems to feed on itself so maybe the shorts get a little bit nervous," said a New York floor trader. "I think we will stay between $3.25 and $3.40 for the next couple of days and then see what happens going into the weekend."

Thursday's Energy Information Administration storage report might have some bearing as to whether the market can hold within its current range. Computer generated orders can often amplify underlying market volatility when the report is released at 10:30 a.m EDT. Estimates are expected to surpass historical averages by a wide margin.

Last year at this time, 20 Bcf was injected, and the five-year increase stands at 42 Bcf. Analysts at Ritterbusch and Associates expect a 68 Bcf increase, while Bentek Energy's flow model calculates a 67 Bcf gain. A Reuters poll of 26 industry observers revealed an average 70 Bcf with a range from 62 Bcf to 79 Bcf.

Near-term temperature outlooks are essentially unchanged, but the market is being forced to price in a small amount of additional storm premium as a second disturbance has emerged and strengthened.

"The disturbance in the western Caribbean is still quite disorganized this morning and conditions remain rather unfavorable for its quick development," said MDA Weather Services Wednesday. "As the disturbance presses northwestward and into the Gulf this weekend conditions may become a little less hostile and allow for some slight organization into a weak tropical system." MDA placed the likelihood of it becoming a tropical storm at 20%.

In subsequent analysis, the National Hurricane Center (NHC) at 2 p.m. EDT Wednesday upped its estimate of the system becoming a tropical cyclone in the next 48 hours to 60%. A second system currently off the coast of Africa was given a 45% chance of development, MDA said, but the NHC in its afternoon report raised the likelihood to 70%.

"The tropical wave working its way across the Caribbean is one possible factor given that its possible track through the central Gulf of Mexico would have some impact on production, although it would likely reduce demand once it moves onshore," wrote Tim Evans of Citi Futures Perspective.

Storage-wise, Evans is estimating a build in Thursday's inventory report of 62 Bcf, somewhat lower than what he sees as the present consensus closer to 70 Bcf.

Under his longer-term scenario "the year-on-five-year average storage surplus would expand to 78 Bcf as of August 30, with the rising surplus representing a downward fundamental pressure on prices. We can anticipate some debate as to whether the decline in price has already discounted further bearish developments, but we continue to see some risk that the market works lower, with some potential prices will probe below the $3.00 mark at some point over the next 4-6 weeks."

 Bottom line: Evans is short. He recommends holding a current short position in September from $3.62 with a protective buy stop at $3.42. "On a break below $3.18 we would lower the buy stop to $3.37."

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