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Nearly All Points Post Modest Losses; Futures Gain

Physical gas prices eased about 3 cents overall Tuesday, and declines were within a relatively narrow range across the country. Eastern markets saw a strengthening in basis, but next-day prices eased with unsupportive weather being cited. Pipelines in Southern California were back in balance from an operational flow order earlier in the week and next-day prices eased. At the close of futures trading July had risen 1.4 cents to $2.232 and August was up by 2.4 cents to $2.287. July crude oil added 62 cents to $83.32/bbl.

Next-day prices at eastern points eased, but basis differentials improved. "Things have improved some. July Algonquin basis was at 15 cents earlier, but now it's 37 cents bid at 40. It can only get so strong. Dawn is pretty weak. Dawn [basis] is at about 14 cents for the July," said an eastern marketer.

"There is just no weather. The question is whether gas at these prices will drive more coal under the [generating] stack given where Nymex is. Once it gets to summer and if it's hot, you need all your generation going. Maybe it doesn't do anything to price."

Quotes at Algonquin Citygate and Iroquois Waddington fell about a nickel, and next-day deliveries on Tennessee Zone 6 200 L were down about a penny.

Farther south, next-day gas delivered to Tetco M-3 fell about a nickel, and deliveries to Transco Zone 6 New York slipped a couple of cents.

West Coast points eased as prices retreated from the double-digit gains posted Monday in the aftermath of an operational flow order (OFO) needed to limit deliveries to the over-nominated SoCal pipeline system. No OFOs were reported by SoCal Tuesday.

Quotes at SoCal border and SoCal Citygate were off less than a nickel. El Paso Mainline dropped about a nickel.

PG&E Citygate was off by about 2 cents, and points delivering gas from the north also dropped; Malin and Opal traded down just a few cents.

Midcontinent locations were also in decline. Quotes on ANR SW and deliveries into the NGPL Midcontinent Pool were down less than a nickel. Gas on Panhandle and Oklahoma Gas Transmission was each about a nickel lower.

Analysts see Tuesday's futures rise as a modest reaction to Monday's price pummeling. The "recovery appeared related largely to the fact that [Monday's] 3.5% selloff was likely overdone in view of fundamental shifts. We feel that the recent price down move has likely run its course until additional guidance is forthcoming from Thursday's weekly storage figures," said Jim Ritterbusch of Ritterbusch and Associates.

He suggested that the market could rise as high as $2.31 before continuing lower. "But we feel that price lows have yet to be placed and that the market will be working its way lower in erratic fashion as this month proceeds," he said. "The weather factor still looks tilted slightly bullish within the coming two-week time window, and this may have also contributed to [Tuesday's] strength. All in all, we are reluctant to read much into [Tuesday's] higher close following the establishment of fresh seven-week lows. We still see the money managers as anxious to accept profits on significant price dips with this implied short-covering prompting occasional price bounces. But a [short term] bearish stance is still favored."

Analysts suggest that coal may be regaining market share. "The natural gas market probed the downside again on Monday, extending last week's losses in conjunction with worries that natural gas has given back some market share to coal in the power utility sector at a time of relatively moderate temperatures that have weakened the current cash market to at least some degree," said Tim Evans of Citi Futures Perspective.

"Given that storage injections are still likely to stay below five-year average rates in the weeks ahead, we think this points to either a general disappointment that progress in reducing the storage surplus has not been more rapid, or that the decline in the storage surplus has not been more effective in supporting prices."

Evans predicts a storage build to be reported this week of 72 Bcf, equal to last year and below the five-year average of 88 Bcf.

In a recent report, Bentek Energy cited an upcoming collision between gas production and storage limitations that could send spot prices below $2 (see Daily GPI, June 8). Excessive storage has been around for a while. Already there is backlog of wells numbering in the hundreds if not thousands in shale plays such as the Marcellus that have been completed but are awaiting installation of gathering facilities and connections to pipelines, Bentek said.

Demand is going to have to increase to relieve the oversupply. According to John Sodergreen, editor of Energy Metro Desk, "The report says that even in a scenario where production remains flat for the entire injection season, total demand will need to average 6.3 Bcf/d stronger than the five-year summer average in order to avoid infrastructure constraints."

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