The physical market gained on average more than 9 cents Monday with strength noted across the board, and not to be outdone spot futures posted the highest settlement since mid-December. Buyers winding up business for bidweek were not happy with recent market strength, but pointed to longer term forecasts showing what they believed would be cooler temperatures in September and October.
Futures traders attributed the day's gains to revised weather forecasts extending warm temperatures into mid-August. At the close of futures trading September had risen 19.9 cents to $3.214 and October had gained 18.3 cents to $3.222. September crude oil retreated 35 cents to $89.78/bbl.
Forecasters are calling for a continuation of the oppressive hot weather that has seared the Midwest for the last few weeks. MDA Information Systems in its six- to 10-day forecast shows above- to much above-normal temperatures for the entire country with the only exceptions being the Gulf Coast, West Coast and portions of the Northern Plains. The greatest anomalies are expected over Kansas and Missouri.
"The major themes of the forecast have held through the weekend as the pattern continues to carry broad above- and much above-normal temps. A few of the details have changed slightly, however, including some hotter trends this weekend in the East and again late period in the Midwest, while California was cooled slightly," the forecaster said in its morning report. "The heat may be a bit less intense than earlier events but remains stout with widespread 90s commonly found across the majority of the PJM region. The evolving WPO [Western Pacific Oscillation] signal supports this outcome, as does the drought and other persistent long term signals."
As August bidweek winds up, buyers were seeing a strengthening basis at Great Lakes points. "We had to pay an 11 cent basis on Michcon and an 11.5 cent basis on Consumers," said a Great Lakes buyer. He added that they would have liked to have paid less, but in the past had often paid considerably more.
"This is more than we have paid on index all year, and we plan to make a good percentage of our August gas at index. It will depend on customer usage, but if you can believe the weather reports, it looks like in September and October we may see some lower prices if the weather gets cooler.
"We have room to store gas in September and October because for the most part our customers storage isn't full. If we just cover their usage this month and don't add to storage, we'll be doing OK. Usually during July and August we are putting gas into storage, but because of the heat, we are not jumping on that bandwagon. It's a roll of the dice. You just do the best you can and hope it all works out."
The National Weather Service in its long term outlook for September, October, and November shows above normal temperatures for the eastern two-thirds of the country with the greatest anomalies centered over Illinois and Indiana.
Quotes throughout the Upper Midwest and Great Lakes rose. Gas delivered Tuesday on Michcon and Consumers added just under a dime. Next-day deliveries at the Chicago Citygates gained 11 cents, and deliveries on Alliance rose about a dime.
Next-day prices for delivery across the Midcontinent soared as temperatures were forecast to dig deep into triple digits. AccuWeather.com forecast the high of 106 Monday in Oklahoma City would rise to 108 Tuesday before rising again to 112 on Wednesday.
Quotes on ANR SW jumped nearly 15 cents and deliveries on Oklahoma Gas Transmission gained about 10 cents. Parcels into the NGPL Midcontinent Pool rose nearly a dime, and gas on Panhandle Eastern advanced about the same.
Prices at eastern points also posted solid gains. Gas delivered Tuesday at Tetco M-3, Dominion, and Clarington all gained about a dime. Next-day gas into Transco Zone 6 New York rose just over a nickel.
Short-term traders were caught a little off guard by the futures strength. "It looks like traders were playing the short end of things and all of a sudden it broke through," said a New York floor trader. "I don't see any reason for the rally other than short covering. Resistance is found at $3.35 to $3.36 and $3.41 to $3.43 above that."
Not surprisingly, open interest futures showed a decided shift to the long side of the market by directional traders. For the week ended July 24 the Commodity Futures Trading Commission reported in its Commitments of Traders Report that at the IntercontinentalExchange traders increased their holding of long futures and options (2,500 MMBtu per contract) by 14,123 to 551,272 contracts and decreased their holdings of short positions by 11,132 to 95,217. At the New York Mercantile Exchange long futures and options (10,000 MMBtu per contract) rose by 8,342 to 211,014 and short contracts decreased by 5,495 to 172,435. When adjusted for contract size long positions at both exchanges rose 11,872 and short positions fell by 8,278.
For the five trading days ended July 24, September futures rose 39.1 cents to $3.177.
Analysts see warm temperatures continuing to support the market into mid-August. "Despite a weaker than expected August contract expiration on Friday, the ability of the nearby futures to hold support at around the $3 level suggests the possibility of some renewed price strengthening as this week proceeds," said Jim Ritterbusch of Ritterbusch and Associates.
"We will also caution against reading too much into Friday's settlement that indicated a last-minute shift to a slight carrying charge in the expiring August-September spread. Next-day cash prices are expected to remain well supported this week with the assistance of some renewed hot temperatures into the Midwest region that is likely to see 90 degree figures in Chicago through the next five to six days. Beyond this week, updates within the six- to 15-day time period that stretch out to around Aug. 12 are still favoring above-normal temps across most of the U.S. with cool patterns limited to the West Coast."
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