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Futures Drop Trumps Heat in Lowering Cash Quotes

A marketer had perceived Monday that the growing abundance of major cooling load, especially in the central and southwestern U.S., would not be able to sustain that day's rally at a majority of cash points because it was accompanied by a screen drop of just under a dime. He was proven correct as softness prevailed in most of the physical market Tuesday.

A few scattered flat to nearly 20 cents higher points prevented the downturn from extending across the board. But most locations recorded losses ranging from 2-3 cents to about 15 cents. The Rockies, where some pipeline constraints were either easing or about to end, tended to see the largest declines, but most drops were in single digits.

Nymex traders continued to proffer negative guidance for Wednesday's cash market, although less so than before, as they pushed July futures another 5.4 cents lower Tuesday despite impressive strength among petroleum-based products (see related story).

More concern about power generation load not being able to make up for dwindling storage injection options may have also weighed on some parts of the market, especially in the Gulf Coast. In its weekly data posting Monday Southern Natural Gas said its working gas storage capacity as of last Thursday stood at 50.5 Bcf, or a whopping 84% of the total 60.0 Bcf. That's with less than three months gone in the normal seven-month injection period.

Southern's current inventory is way ahead of last year's injection pace, when 33.6 Bcf (56%) was full as of June 19, 2008. However, the surplus is much less imposing when compared with the 46.1 Bcf (77%) on June 21, 2007.

Forecasts of high temperatures from the low 90s to the mid 100s pervade the southern half of the U.S. and even extend into much of the Midwest and Rockies. Little letup is seen anytime soon in those areas. But relatively mild peaks in the 70s in the Northeast and Pacific Northwest are contributing relatively little cooling demand.

Despite the currently large amounts of air conditioning load in the central U.S., a Midcontinent marketer said his company still hasn't seen enough purchase orders from power generators to make it worthwhile to "backdraft" out of its storage accounts in Oklahoma. For that reason and the further futures softening Tuesday, he said he expects minor weakness to again dominate most of the cash market Wednesday.

He said some trading counterparties are starting to do a little tire-kicking on July business, but he hasn't seen anything actually happening yet.

The marketer made a case that there's a good chance of REX-East partial service, now due to come on-line by the end of June (see related story), may strengthen basis in July for some Midcontinent pipes. He reasoned that REX-West is already running full supplying gas into its already-active interconnects with Kinder Morgan Interstate, Northern Natural Gas, NGPL, ANR and Panhandle Eastern. As new REX-East capacity becomes available into Indiana and Ohio, some Midcontinent gas very well could be required to fill the new segment, he said.

It's more likely that the addition of REX-East capacity will have more impact on weakening Gulf Coast basis, the marketer added.

The National Weather Service (NWS) predicts a torrid June 29-July 3 workweek for the central two-thirds of the U.S. In its six- to 10-day forecast posted Tuesday afternoon, NWS looked for above-normal temperatures everywhere between one line extending to the south-southwest from central Montana through the extreme southeastern corner of Nevada and another line going southeastward from Michigan's Upper Peninsula to the western ends of the Carolinas before curving back through central Georgia and the western Florida Panhandle. The agency expects below-normal readings in New England along with eastern New York state, and in all of Washington state along with northern Idaho and most of Oregon.

A low-pressure trough in the southwestern Gulf of Mexico off the eastern coast of Mexico and southeast of the southern tip of Texas continued to produce disorganized showers and thunderstorms, the National Hurricane Center (NHC) said Tuesday. A northwestward movement was expected, but NHC gave the system a "low chance" (less than 30%) of significant development with the following 48 hours. The Atlantic tropical scene remained quiet otherwise.

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