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Cooling Load Declines Soften Cash Market

A stormy cold front that moved south from Canada has begun driving high temperatures in sections of the Midwest and Northeast lower into the 80s and occasionally 70s. The resultant declines in gas demand for power generation, although generally modest, had prices falling at nearly all points Wednesday.

A 5.2-cent rebound by August futures on the previous day obviously was unable to sustain this week's initial cash price run-up, and renewed gains Thursday seemed unlikely after Nymex's prompt-month contract plunged 14.6 cents Wednesday (see related story).

Texas Eastern-East Texas, which had been the only point to realize a small loss a day earlier, was the only firmer point Wednesday in rising about a nickel. Overall losses were largest in the New England market, ranging from 2-3 cents to about 40 cents.

Tropical activity in the Atlantic Basin was showing signs of life again -- but not much. Wednesday began quietly, but by afternoon what the National Hurricane Center (NHC) called "a large but disorganized area of cloudiness and thunderstorms" over the southeastern Gulf of Mexico and southern Florida, along with portions of Cuba and the Bahamas, was associated with a tropical wave interacting with an upper low. NHC expected this activity to drift northward but accorded it only a 10% chance of development into a tropical cyclone within the succeeding 48 hours.

An Overage Alert Day issued by Florida Gas Transmission (FGT) didn't prevent FGT's three production-area zones from slipping about a nickel to nearly a dime, while IntercontinentalExchange reported Zone 3 volumes traded on its platform dropping by more than half from 119,400 MMBtu Tuesday to 53,600 MMBtu Wednesday. Another pipe serving the Florida market, Gulfstream, also initiated action to keep linepack from falling below its target range.

Highs had started reaching the 80s in parts of the Pacific Northwest, but the Northwest Pipeline bulletin board indicated those temperatures will already be in retreat approaching the weekend. However, temperatures were inching higher in the Rockies, while the West Coast, Western Canada and desert Southwest were due to remain cool, warm to mild and severely hot, respectively.

The South is another area where temperatures are generally stagnating for the time being, although highs in the low to mid 90s will keep nearly all air conditioners humming. A few parts of the Northeast and Midwest also can expect little change in temperatures, while others such as Chicago and the area from New York City through New England are predicted to see significant drops.

Westcoast said a high-linepack problem was getting worse Wednesday in its Mainline North and Mainline Central sections.

A Midcontinent producer acknowledged that his region had begun a cooling off that would take Oklahoma peak temperatures from the mid 100s Tuesday to the mid 90s Thursday. However, he said, that was still hot enough to maintain strong gas demand by power generators.

Despite the losses, cash numbers were still relatively strong in comparison with futures, the producer continued. He sold into Enogex at $4.30 early, and that was slightly above the screen at the time, and cash quotes later softened along with prompt-month futures.

At first he said he had no estimates on Thursday's cash market, considering it kind of a toss-up on influences between Wednesday's futures weakness and the remaining heat, but then said "maybe" there would be further moderate softness in physical quotes. "I've given up" on Nymex trading, he said, because its price moves just don't seem logical at times.

A Northeast marketer was more definite in expecting more price declines Thursday, saying his company detected a fair amount of dropoff in the region's gas-fired electric generation demand from Tuesday. He noted that a major drop at the Algonquin citygate had contracted its basis spread from Henry Hub to a little more than half a dollar (it had been 75 cents Tuesday).

He said spreads between Northeast points have gotten too tight to find any worthwhile profits in moving gas around, citing the Algonquin citygate and Tennessee Zone 6 being only about a nickel apart Tuesday and Wednesday.

Societe Generale analyst Laurent Key commented that generally bearish fundamentals are being ignored to some extent as the market prices in the risk of intense heat later this month and next month, potentially keeping futures above $4.20 until mid-August. However, he sees two factors mitigating the impact of a widespread heat wave on power generation load this summer: a "strong hydro season likely to extend into August, [and] the nonflexibility of coal deliveries to power plants, forcing coal power producers to compete with lower-cost [gas]-fired generation."

Key also noted "the regional breakdown of heat events in June. The Midwest was much above normal but only has a small amount of gas-fired capacity, while California has remained relatively cool and powers most of its market with natural gas."

With the traditional storage injection still not quite at its halfway point, Southern said that as of June 30 it had 45.1 Bcf, or 75% of 60.0 Bcf in total working gas capacity, at its two storage fields in Louisiana and Mississippi. That's a rapid refill pace, but actually it was exceeded two years earlier when Southern reported 52.9 Bcf (88%) in inventory as of July 2, 2009. On July 1, 2010 the volume stood at 40.7 Bcf (68%).

In descending order of volume, analyst estimates of the storage injection volume for the week ending July 1 include 86 Bcf (Stephen Smith of Stephen Smith Energy Associates), 85 Bcf (Kyle Cooper of IAF Advisors), 82 Bcf (Tim Evans of Citi Futures Perspective) and 80 Bcf (Stefan Revielle of Credit Suisse). Evans goes further out in projecting decreasing builds of 68 Bcf, 58 Bcf and 50 Bcf for the weeks ending July 8, July 15 and July 22, respectively.

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