Feeding off of Friday's new lows for the down-leg in natural gas futures, a vast majority of cash market averages followed suit on Monday with most points declining from a few pennies to nearly a dime. Out West the tune was a little different as most points gained at least a nickel as the region faced some of the warmest temperatures it has seen all summer.
September natural gas futures on Friday reached a low of $4.109 before closing the regular session at $4.117, down 5.4 cents from Thursday's finish and 21.1 cents lower than the previous week's close. Cash prices won't find any support from the screen's actions on Monday either. The prompt-month contract pushed to a $4.029 low before closing at $4.066, down 5.1 cents (see related story).
The West's "disconnect" from the rest of the country on Monday was likely due to gas-fired generation coming online to meet increased air conditioning demand, a West Coast trader told NGI.
"We got some heat that set in for much of the West Monday, so we expect to see some generation needs for the next couple of days," the trader said. "Prices are beginning to reflect that. The disconnect between the West and the rest of the country Monday likely occurred because some cooling is occurring in the East. I think that brought some of the gas back our way. We're expected to see the warmest temps that we've had all summer through at least Wednesday."
Despite the uptick in prices, the trader noted that gas supply is not the issue. "In terms of storage gas, we're still stuffed basically across the country. While we've fallen off of last year's record refill mark, there is a lot of gas in the ground right now. I think we'll certainly see the repercussions of that come the fall. Prices could come off even more."
One of the factors that market watchers continue to attribute to the price weakness is the lack of storm development in the tropics. That might be currently changing, according to AccuWeather.com. Validating AccuWeather.com Chief Hurricane Expert Joe Bastardi's prediction that the 2010 Atlantic hurricane season would ramp up starting Aug. 20, the tropics have suddenly become more active. Bastardi also said he still expects a "frenzy of activity" in the coming weeks.
Heather Buchman, a meteorologist with AccuWeather.com, noted that while just-formed Tropical Storm Danielle could strengthen into a "major hurricane" toward the end of the week, the odds are against a direct impact on the U.S. as Danielle is expected to stay over water this week, passing well north and east of the Lesser Antilles, then curving northward over the western Atlantic. However, she added that Tropical Storm Early could be right around the corner in the form of a system that just moved off the west coast of Africa and that a cold front projected to move into the northern Gulf of Mexico later this week could "spin up yet another tropical storm."
Backwardation remained in play for natural gas because the cash price is still trading at a premium to the spot contract. According to IntercontinentalExchange (ICE), the Henry Hub average declined by 7 cents for Tuesday delivery to $4.1195, or a little more than 9 cents higher than September's close on Monday.
Hencorp Futures LLC broker Tom Saal recently told NGI that the natural gas market's "steady state of backwardation" usually occurs in the withdrawal season during the winter, not during the injection season or summer. "Normally during the summer you see a forward carry market where the spot contract is trading at a premium to the cash market, reflecting the cost of storage," he said (see Daily GPI, Aug. 11).
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