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Big New England Gains Can't Offset Wider Weakness; Futures Flop

Natural gas prices for physical delivery Tuesday declined on average 4 cents overall in Monday's trading. Losses were widespread, but weather driven strength in New England was able to offset pervasive declines elsewhere. East, Rockies and California locations all fell anywhere from a few pennies to close to a dime.

At the close of futures trading, soon-to-expire November plunged 13.8 cents to $3.569 and December fell 15.1 cents to $3.661. December crude oil added 83 cents to $78.68.

Forecasts of falling temperatures in New England helped prompt gains approaching a half dollar.

AccuWeather.com predicted that the high Monday in Boston of 57 degrees would drop to 48 Tuesday before recovering to 52 on Wednesday. The normal high in Boston at this time is 58. Providence, RI's Monday high of 58 was anticipated to slide to 50 on Tuesday before regaining reaching 54 on Wednesday. The seasonal high in Providence is 60. Hartford, CT's high of 57 Monday was predicted to drop to 49 Tuesday and climb to 54 on Wednesday. The normal high in Hartford is 59.

The National Weather Service in southeastern Massachusetts said "a cold front will slide south of the region [Monday] allowing for cool conditions to persist through Tuesday night. As high pressure moves offshore around middle to late this week...milder air works in along with some showers.

“A band of heavier showers along with gusty southwest winds will move in late this week into the weekend as a cold front pushes across. Some showers linger through the weekend...then colder and blustery conditions work in early next week as high pressure approaches."

Gas at the Algonquin Citygates surged 45 cents to $4.62, and deliveries to Iroquois Waddington gained 3 cents to $4.07. Tennessee Zone 6 200 L next-day gas was quoted at $4.69, up 46 cents.

To the south declines were more nominal. Gas on Dominion was quoted at $3.47, down 3 cents, and deliveries to Tetco M-3 came in at $3.62, down 9 cents. Gas headed for New York City on Transco Zone 6 fell 5 cents to $3.79.

Rocky Mountain producers are now enjoying price parity with the Henry Hub.

"If we don't have any weather out here, there is no place for that gas to go and the differential [CIG to Henry Hub] widens,” said a Denver producer. “It just becomes a regional oversupply, but there are hydro issues in the West.” He noted that Clay Basin did not go down for maintenance thus facilitating movement of Rockies gas to market and firmer pricing. "Production isn't growing out here in the West. We don't have any Marcellus-type monsters, and it looks to me like we have a tale of two countries in the gas market."

Quotes on CIG for Tuesday delivery eased 2 cents to $3.61 and at Cheyenne next-day gas came in at $3.66, down 2 cents. Gas on Northwest Pipeline Wyoming shed 3 cents to $3.59, and deliveries to Opal were off 3 cents to $3.65.

Gas at the Henry Hub changed hands at $3.62, down 5 cents.

Other market centers lost close to a dime. Chicago Citygates next-day deliveries fell 8 cents to $3.83, and at the NGPL Midcontinent Pool packages for Tuesday dropped 6 cents to $3.66. At the SoCal Citygates, gas came in at $3.92, down 4 cents.

Futures prices look to be on the defensive for Tuesday’s November contract expiration. "The weather seems a little bit milder, so [Tuesday] I think we will come off a little bit more," said a New York floor trader. "The market looks like it will have a tough time rallying over the next week. I don't think anything crazy will happen with Tuesday's expiration, but there looks to be a little bit of length in this market so there should be some November selling tomorrow and we go down to $3.50."

Weather forecasts are calling for warmer temperatures over the nation's mid-section and West. WSI Corp. in its Monday six to 10-day outlook said the trend is "colder over the East early, but warmer over the West and central U.S. when compared to Friday's forecast, which is partially due to a shift in the period.

“Confidence in [Monday’s] forecast is near to slightly above average standards as models are showing good large-scale agreement with regards to the anticipated pattern evolution through Day 10."

Risks to the forecast included temperatures “warmer than forecast over the South and East under strong southerly flow ahead of a developing cold front. Temperatures could run colder over the interior Northwest under a digging cold trough."

In a weekend note to clients, DEVO Capital President Mike DeVooght said the market looked like it was "deriving support from pre-winter buying, but fundamentally, it continues to be difficult to be a natural gas bull. We still feel the higher probability is for the gas market to trade in a low $3.00 to low $4.00 range for the foreseeable future. We will use rallies approaching $4.00 as an opportunity to add to our producers' hedges."

From a risk management and trading perspective, DeVooght continues to favor the short side of the market. He suggests trading accounts hold a short November position rolled from earlier levels at $4.35 and risk 25 cents on the trade. End users should stand aside, and those at risk for lower prices should continue to hold a short November-March strip at $4.50-4.60.

Addison Armstrong of Tradition Energy sees the heavy short covering of last week giving way to fluctuating weather forecasts and near-record production levels of gas, which "appear to have reignited the market's sell-off as this month's bid week trading gets ready to kick off."

Tom Saal of INTL FC Stone in his work with Market Profile was looking for the market to test last week's value area at $3.672-3.562. The November contract expires Tuesday and next week he expects "Minus Development" to contain market movements to a range of $3.757 to $3.624.

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