The cash market finished the last day of August bidweek Tuesday by posting an overall gain on average of nearly 9 cents. A forecast of warmer temperatures for New England locations helped lift eastern prices, and expected increases in demand for power in California gave physical gas prices there a boost. At the close of futures trading September had eased five-tenths of a cent to $3.209 and October had slipped 1 cent to $3.212. September crude oil plunged $1.72 to $88.06/bbl.
Prices at Northeast points rose as forecasts called for much warmer temperatures Wednesday. Forecaster Wunderground.com predicted that the high in Boston of 73 Tuesday would rise to 81 Wednesday, just a degree under the normal high for this time of year of 82. Hartford, CT, was expected to see its Tuesday high of 82 rise to 84 Wednesday. The normal high in Hartford at this time of year is 85.
Deliveries Wednesday to the Algonquin Citygate rose nearly 30 cents, while gas into Iroquois Waddington gained more than 15 cents. Parcels on Tennessee Zone 6 200 L also added close to 30 cents.
Other East points were firm as well. Tetco M-3 rose about a dime, and gas into Transco Zone 6 NY gained a few pennies more. Clarington gas increased by 8 cents, and next-day gas on Dominion rose by just south of a nickel.
"We thought everybody was a little long in July and had bought a lot more baseload, but prices came down throughout the month when there was not as much weather," said an eastern marketer. "We are thinking the way the basis looked coming into August, we don't think people bought as much gas, so on those days when people need to buy, gas prices will be more like June, more spikey when people need gas because they didn't baseload as much. I think a lot of people will be in the day market. We are thinking we will see a little stronger [eastern] basis."
Western points firmed. At the Cheyenne Hub next-day gas rose almost a dime, and on CIG Mainline Wednesday deliveries were quoted almost 15 cents higher. Gas flowing for Wednesday on Northwest Pipeline Wyoming added 8 cents, and deals done for Opal delivery gained a dime.
In California Wednesday volumes also gained ground as power demand was expected to increase. By early afternoon Tuesday the California Independent System Operator said statewide load was running 35,563 MW, but Wednesday's peak load was expected to reach 39,800 MW.
Quotes on PG&E Citygate were running about a nickel higher, and gas at Malin added about a dime. SoCal Border added 13 cents, and El Paso S Mainline rose close to 10 cents. Wednesday gas on SoCal Citygate advanced about 8 cents.
Futures traders were circumspect about the market's next move. "We traded up to $3.27, and then all of a sudden it comes off 7 cents. It gets pushed down to $3.16 and then we rally back to unchanged," said a New York floor trader. "The market feels like it wants to go higher. There may be some shorts in the market feeling some pain, but I don't have a good feel right now. If anything, I think we will test $3.40 and see where we go from there."
Risk managers have tweaked their strategies to accommodate Monday's 20-cent surge in the September contract. Prior to Monday's gains, analysts at DEVO Capital, a Colorado-based trading and risk management firm were thinking that "the gas market is making a major bottom. But, at this time, over the short term we don't feel there is much upside from these price levels in the balance of the summer contracts."
From a strategy standpoint, DEVO planned to "use rallies above $3-3.20 in the summer months and $3.75-3.95 in the winter as a selling opportunity. We would also be selling calls in the balance of the summer with strike prices of $3.00-3.35."
Monday's rally gave the firm the opportunity to sell call options. DEVO's risk management plan had trading accounts and end-users standing aside, and producers and those with exposure to lower prices holding on to a stack of October $2.50 put options designed to cover the summer strip at a debit of 25-27 cents.
DEVO is now selling a single September call option to take advantage of the hefty premiums. "Now that we are at the topside of a trading range, we want to sell calls to offset a portion of the cost of the put options. If we sold the $3.20 September call option for 20 cents, our roll up level would be $3.40. At $3.40 we would buy back the $3.20 and sell another at-the-money call at $3.40," the firm said.
Much of Monday's rally was predicated on weather forecasts that show no relief from a pattern of sweltering heat in key Midwest and eastern energy markets. Now traders have two tropical systems to deal with.
In its 2 p.m. EDT Tuesday report the National Hurricane Center (NHC) said it was following a tropical wave with embedded low-pressure halfway between the coast of Africa and the Lesser Antilles. NHC said "environmental conditions appear conducive for some gradual development of the low over the next few days. This system has a low chance, 30%, [up from 20% ] of becoming a tropical cyclone during the next 48 hours as it moves westward at 10-15 mph."
NHC is also monitoring a westward moving wave over the central Caribbean. It gave it a "near 0% chance of developing into a tropical cyclone in the next 48 hours."
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