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Cash Adds an Inch, But Futures Take a Mile

The physical gas market overall rose about a penny Thursday as traders scrambled to get deals done before the release of a key government report. Maintenance on a Northeast pipeline prompted double-digit gains at several points in New England. The Energy Information Administration (EIA) reported an inventory build of 67 Bcf, which was significantly less than market expectations, and prices surged. At the close of futures trading July had soared 31.0 cents to $2.495 and August had advanced 30.5 cents to $2.541. July crude oil added $1.29 to $83.91/bbl.

"There's not much load in our neck of the woods, but Algonquin is undergoing major maintenance and that is why prices jumped," said an eastern marketer. "They basically cut everyone back to use their primary capacity, and it looks like it will be for three weeks."

Michael Palmer, a meteorologist with The Weather Channel, said high pressure would keep most of the Northeast dry Thursday and the entire region dry Friday. "Mostly sunny skies dominate over the region, especially interior sections, with more clouds expected closer to the coast [with] highs mainly in the 70s from Maryland and Delaware northward [and] some parts of eastern New England hold[ing] in the upper 60s."

Friday gas on Algonquin jumped by close to a quarter, and quotes on Iroquois Waddington and Tennessee Zone 6 200 L added more than a dime.

Symptomatic of the oversupplied nature of the industry in general, Tennessee issued a systemwide OFO excluding a small stretch of pipeline in New England. The company said it was "due to limited flexibility caused by high storage levels" and would take effect Saturday.

Other eastern points were flat. Tetco M-3 and Transco Zone 6 New York traded less than a penny in either direction.

Most points in Texas were steady to lower. NGPL S TX and Katy were seen flat, and gas at the Houston Ship Channel was about 2 cents lower. Gas at Carthage was unchanged, as were deliveries to Waha.

A southern utility manager shed some light on the coal-to-gas-to-coal fuel switching dynamic as heavier seasonal power generation loads are anticipated. "You'll just go further up the stack. All that will happen is that you will continue to burn the bananas out of natural gas but go deeper into the coal burning and fire up those plants. For short-term needs your CT [combustion turbines] will become the peakers for reliability purposes. Combined cycle gas units will continue to run," he said.

"The rule will be that if market-priced power is cheaper than coal, then you will buy market power."

Futures traders were of the view that the day's stout rally was due to short-covering and not any fundamental shift in market supply-demand balances. "I think the market is just covering shorts, and the fact that it is not closing above $2.50 is not bullish," said a New York floor trader.

"People got spooked out and it doesn't mean we are moving higher. I think prices could fail a little bit tomorrow going into the weekend. The market would have to get above $2.57 to see a change in pattern."

The 10:30 a.m. EDT release of Energy Information Administration (EIA) inventory figures was able to give some clues to the current level of coal-to-gas switching. One argument is that the only factor keeping natural gas prices above $2 has been the heavy use of peak load generation by utilities for baseload power. All indications are that weather will be relatively mild and peak load generation not an issue for about the next two weeks, but at some point warm summer weather will arrive, presumably necessitating greater use of coal at the expense of natural gas. For the moment indications are gas-driven power generation has not subsided.

The EIA report was expected to show inventory gains less than longer-term historical averages. Last year, 72 Bcf was injected, and the five-year pace stands at 88 Bcf. The large storage surplus over the last several weeks has been slowly eroding and for the week ended June 8 that trend, at least relative to five-year averages is likely to remain in place.

Ritterbusch and Associates calculated a 71 Bcf increase, and a Reuters poll of 27 traders and analysts revealed an average 74 Bcf with a range of 67-85 Bcf. Industry consultant Bentek Energy predicted a 75 Bcf gain.

According to students of Elliott Wave and Retracement analysis, Wednesday's transit below $2.19 by July futures sets up a move to still lower prices. "With Tuesday's potential doji star [candlestick] bottom negated and the intraday RSI [relative strength indicator] pulling back from oversold levels, further downside now looks likely," said Brian LaRose of United-ICAP in a post-close note to clients.

"How low can natgas go? If this retreat is corrective in nature natgas should be able to find support into the $2.085-2.041-2.029 zone. Fail to carve out a bottom into this cluster of support and our next downside objective becomes $1.222."

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