Cash markets tumbled about a dime on average Thursday as weakness in eastern basis markets leaked into next-day trading, and traders noted reduced power demand. A weak futures open and a bearish storage report also added a soft tone to the day's trading.
The Energy Information Administration (EIA) reported an increase of 62 Bcf, well above the 55 Bcf the market was expecting. At the close of futures trading July and August had both tumbled 14.7 cents to $2.274 and $2.327, respectively. July crude oil fell 20 cents to $84.82/bbl.
East and Northeast points weakened not only in the next-day market but also in more deferred strips and basis trading. "We've seen a lot of selloff in the July-August strips and summers have lost a lot of strength as well," said an eastern markets trader.
"We've seen a lot of movement from the prompt month out to April-October 2013. Everything else is just hanging in there. This week July-August Algonquin, [Tetco] M-3, and [Transco] Z6 have come off a lot. July Algonquin was close to 40 cents at the beginning of the week and was down to 37 cents today [Thursday], M-3 is under 20 cents and Z6 is down to the low 30s.
"Summer 2013 started to selloff yesterday and everything else followed," he said.
In the next-day market quotes at eastern and Northeast points moderated as well. Transco Zone 6 and Tetco M-3 both slumped by just less than a dime.
Algonquin Citygate and Tennessee Zone 6 200 L were each down more than a nickel and Iroquois Waddington had to endure a decline of almost 10 cents.
Physical markets may get some help near term as weather patterns favoring eastern and Midwest heat begin to set up. "[A] pattern favoring 90-degree temperatures from Chicago to Cincinnati to Washington, DC, will set up shop this weekend," said AccuWeather.com meteorologist Alex Sosnowski.
The warm weather is expected as a result of the dissolution of an "atmospheric road block caused by a buckle in steering winds high in the atmosphere, known as the jet stream which took on the shape of the Greek letter Omega over North America.
The Omega Block inhibits the west to east progression of west systems and brought days of cool, unsettled conditions to the Northeast and the Northwest," he said.
Southern California markets suffered a double-digit decline as power loads were forecast to decline. "The [power] burn is forecast to fall from 2.7 MMcf/d to 2.6 on June 8 and decline into the weekend. It's slowly sliding down," said a southern California trader.
Quotes at points both within and feeding into California markets dropped. At PG&E Citygate, SoCal Citygate and SoCal Border, gas for next-day delivery fell nearly a dime apiece.
Gas at Malin slumped approximately just more than a dime.
Midcontinent points continued lower with the market and saw no pricing effects from Wednesday's declaration of force majeure on Kinder Morgan's NGPL pipeline near Amarillo. NGPL Midcontinent Pool was about a dime lower, and Panhandle Eastern was quoted close to 10 cents lower as well. Oklahoma Gas Transmission dropped a feqw pennies more, and ANR SW fell 15 cents.
Great Lakes locations were relatively strong, posting losses of less than a dime. Michcon, Consumers and Chicago Citygates were all quoted about 8 cents lower.
Futures traders saw some important support numbers taken out. "When we broke below $2.32 [support] we fell down to $2.296," said a New York floor trader. "It looks like $2.15 to $2.20 is the next objective lower. A bearish trend might be in here for a little bit," he said.
That bearish trend got off to a running start with the 10:30 a.m. EDT inventory report by the EIA. The question of a pending collision at the end of the storage season between too much gas and not enough storage certainly received no clear resolution with today's report of a 62 Bcf build.
Stocks currently stand at 2,877 Bcf, and about 56 Bcf in weekly injections are needed to bring inventories to EIA-estimated full capacity of just over 4,100 Bcf by the end of October. Last year, however, a stout 81 Bcf was injected, and the five-year average is a hefty 99 Bcf.
For this week analysts were estimating a build of only about half the five-year average. ICAP Energy calculated a build of 60 Bcf, but a Reuters poll of 24 analysts and traders revealed an average of 56 Bcf with a range of 45-75 Bcf. Industry consultant Bentek Energy predicted an increase of 55 Bcf.
Despite today's build, analysts see the storage surplus continuing to shrink, thus diminishing the likelihood of a storage "overflow" by the end of the injection season. Rusty Braziel of RBN Energy said, "volume is down by about 1.5 Bcf/d," but "natural gas production has been basically flat since the first of the year...Any production declines from dry gas plays like the Haynesville have been offset by increases from wet gas plays and the Marcellus dry zone. Second, gas production as measured by pipeline nominations in the Bentek system are down hard over the past few days, primarily due to pipeline maintenance in the San Juan and similar mechanical constraints in the Southeast/Gulf. Once the hardware problems are resolved, expect to see production to recover and continue to increase."
According to Braziel, gas for power generation has ramped up from 19.5 Bcf/d to 25 Bcf/d and has spiked as high as 29 Bcf/d just nine days ago. "So far, there is little sign that power generators are backing off the use of natural gas due to higher prices or looming coal stockpiles," Braziel said. "One factor to consider is what happens when electrical peaking requirements come into play. Much of the power-based gas consumption comes from peaking units not designed to handle baseload generation."
With flat production numbers and increasing power demand Braziel sees "the supply-demand picture for natural gas get[ting] a little closer to being balanced. Production is still strong. But imports (both Canadian and LNG) are down, and power demand has stepped up to absorb the extra supply. The gas market is not out of the woods, but it is looking less likely that storage volumes will hit the wall in October or November."
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