Lack of heat and hurricanes, ample supply and capacity constraints were once again working in concert Friday for weekend and Monday natural gas delivery as physical gas price averages across the country continued lower with certain infrastructure-challenged locations in the Northeast coming off by 50 cents to nearly a dollar. September natural gas futures continued to probe lower Friday and ended up dropping 4 cents to close at $3.347, a fresh five-month low for a prompt-month close.

Most cash points nationally dropped Friday from a couple of pennies to a dime, but spots in the Northeast declined from a dime to 15 cents, with capacity-constrained locations in the Marcellus dropping significantly more. Transco-Leidy Line, which had been the most volatile point during the week thanks to a supply glut of Marcellus Shale gas and transportation issues (see Daily GPI,Aug. 2), had a low trade of $1.15 and ended up dropping 86 cents Friday to average $1.72/MMBtu. Likewise, Tennessee Zone 4 Marcellus recorded a low trade of $1 and fell 56 cents to $1.54/MMBtu.

"The capacity constraints on Transco and the lack of other capacity is really making a mess of things," said a Northeastern marketer. "The Marcellus, and to a lesser degree the Utica Shale, are pumping out gas, but there is no place for it to go. Add to that the fact that the demand picture is fairly weak, thanks to a mild summer, and it's no wonder we're seeing $1 quotes."

Outside of the fun and games in the Northeast, most points elsewhere continued a methodical march to lower prices on Friday. Down along the Gulf Coast, the Henry Hub slipped 4 cents to average $3.39/MMBtu, while deliveries to the Houston Ship Channel also declined a nickel to $3.35/MMBtu.

Most declines in the West were by a few cents more. SoCal Citygate lightened by 7 cents to $3.61, and PG&E Citygate was down 9 cents to $3.60.

Natural gas supply remains a hot topic with traders and analysts. One day after the Energy Information Administration (EIA) reported that production from unconventional wells in Pennsylvania's Marcellus Shale was strong enough to keep the U.S. gas output total at 81.84 Bcf/d in May, just 0.3% higher than the 81.61 Bcf/d reported in May 2012 (see Daily GPIAug. 1), the government agency was back with another report on ample production levels.

EIA reported that U.S. oil and natural gas exploration and production companies added 31.2 Tcf of wet natural gas proved reserves and almost 3.8 billion bbl of crude oil and lease condensate proved reserves in 2011 (see Daily GPIAug. 2). While the increase in wet gas proved reserves was less than the 2010 increase of 33.8 Tcf, proved reserves of wet gas still reached a new record high of 348.8 Tcf, and it was only the second year since 1977 that natural gas net reserves additions surpassed 30 Tcf, EIA said.

"Horizontal drilling and hydraulic fracturing [fracking] in shale and other 'tight' (very low permeability) formations continued to drive record increases in proved oil and lease condensate and natural gas reserves in 2011," EIA said.

Strong production levels don't appear to be tapering if rig counts are any guide. Drilling services firm Baker Hughes on Friday reported that the number of gas rigs actively drilling for the week increased by 19 rigs to 388, while the number of horizontal rigs in action added six to 1,073 rigs.

Tom Saal, vice president at INTL FC Stone in Miami, said that while all signs point to the downside remaining vulnerable in the currently bearish natural gas futures arena, he noted that prices still remain higher than last year at this time.

"The current state of falling prices is attributable to three things," Saal told NGI. "The weather, the weather and the weather. It is the same story I am hearing from everyone I talk to. The last couple of summers have been sweltering, but this year it looks like we're getting a pass. Supporting factors in this bearish market are the fact that people are not concerned about supply and the economy isn't all that strong. In addition, we don't have any hurricanes on the horizon to be nervous about either."

Addressing the question of where natural gas futures are likely to go from here, Saal pointed out that if history is any guide, the route is clear. "I'm not sure whether we'll test the $3 level, but historically, the market grinds lower into September," he said. "Using Market Profile, my charts highlighted pretty strong support around $3.64-3.65, but we pushed through that finally. Next was $3.400-3.4100, but we settled below that level Thursday. This behavior leads me to believe we probably have more downside here."

Even with all this bearish talk, Saal said market participants should be aware of something in particular. "On Aug. 2, 2012 the close was $2.920, so we are still higher than last year, even though last summer was a hot one. Currently, we don't have any weather, but we're not seeing storage injections in the 80-90 Bcf range. Fundamentally, either the supply is less or the demand is more. Outside of that, I'm not sure it can be explained."

Jim Ritterbusch of Ritterbusch and Associates agrees that weather is the dominating story right now. "With the short-term temperature views still decidedly bearish into mid-month and beyond in some cases, the market's response to [Thursday's] small 2 Bcf miss in the EIA storage figure was accentuated," he said Friday. "This figure was quickly digested and the market focus is now largely placed on additional stronger than normal storage increases that now appear assured within the next three EIA releases."

 Ritterbusch pointed out now that his $3.380 support level was tested Thursday, the next price level to look at is $3.320, which will likely come sooner rather than later if temperature forecasts fail to shift warmer.