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Northeastern Weakness Belies Firm Market; Futures Off

Prices of natural gas for delivery Thursday inched higher across much of the country except for in the East, where prices dropped from a dime to $1 at most spots, and up to $10 at some often constrained points serving the New England market.

At the close of futures trading the January contract had eased 3.6 cents to $4.251 and February had given up 3.0 cents to $4.274. January crude oil added 58 cents to $97.80/bbl.

Prices were mostly lower across the Mid-Atlantic as warmer temperatures were forecast to temper winter's recent wrath. In Washington, DC, "temperatures will trend back to near average for mid-December by Thursday then above average Friday into the weekend," according to AccuWeather.com meteorologists. If their figures are correct, record-challenging readings are possible both days of the weekend with temperatures Sunday forecast to climb to near 70.

According to Genscape data, now that the major Arctic storm from earlier in the month is behind us, U.S. net imports of natural gas have fallen back 23.6% from their December 11th high of 6,870 thousand MMBtus. This drop in demand flows has been particularly pronounced at NGPL Midcontinent with flows plunging 64.6% over the same period.

"With the anticipated weather now through the end of the month, temperatures for December may average close to normal," said AccuWeather.com meteorologist Paul Pastelok. "As of Dec. 16, temperatures have averaged 0.7 degrees below the normal of 38.6 degrees for the month," and he expects the weather pattern to erase much of this local temperature deficit by the end of the month with well above-average warmth forecast late this week into the weekend.

"There will still be a few chilly episodes later in the month, but not to the extreme of what we have experienced during late November into early December," Pastelok said. He also said the warmup would not mean an end to potential snowstorms for the upcoming winter.

Major metropolitan areas in the Mid-Atlantic won't have to wait for the weekend to see a healthy warming trend. AccuWeather.com forecast that New York's Wednesday high of 37 would reach 44 on Thursday and 50 on Friday. The normal high in New York this time of year is 42. Philadelphia's Wednesday max of 37 was predicted to rise to 45 on Thursday and 52 on Friday. The seasonal high in Philadelphia is 44. Baltimore's Wednesday high of 38 was seen advancing to 49 Thursday and 54 by Friday, well ahead of its seasonal norm of 44.

Power generators relying on natural gas to fuel combustion turbine generation equipment found themselves with lower next-day peak power prices and little incentive to make strong bids for next-day gas. IntercontinentalExchange reported that peak power for Thursday delivery to the PJM West terminal fell $9.82 to $38.88/MWh. Power into the New England ISO's Massachusetts Hub plummeted $54.52 to $98.17/MWh.

Quotes on Thursday deliveries to Transco-Leidy rose 17 cents to $3.46, but gas at the Tetco M-3 delivery point tumbled 45 cents to $4.17. Gas on Dominion shed 6 cents to $3.54, and gas bound for New York City on Transco Zone 6 fell 62 cents to $4.39.

Next-day gas prices at New England locations led the day's charge lower, but the winter chill has not gone out of longer term pricing. A Houston-based analyst with a major pipeline noted that January Algonquin basis was quoted at $13 and balance of the winter was going for $10.60.

Gas deliveries Thursday to the Algonquin citygates dropped $8.64 to $12.59, and gas at Iroquois Waddington slipped $1.40 to $5.41. Deliveries on Tennessee Zone 6 200 L fell $10.02 to $11.13.

Prices in the Midwest rose as normal cold along with ice and wet snow was predicted. Tom Skilling of the Chicago Weather Center forecast a high of 37 Thursday with "some light rain or drizzle possible in the afternoon, possibly mixed with some ice pellets for northern counties toward the Wisconsin line. A good chance of rain for Chicago and south overnight but ice pellets and mixed wet snow possible [for] northern counties into southern Wisconsin where a dusting to as much as 1.5 inches of snow may accumulate. Southwest winds shift to the northeast late at much lower velocities averaging 3 to 9 mph."

Quotes for next-day gas delivery on Alliance rose 8 cents to $4.49, and gas at the Chicago citygates was seen at $4.49, up 9 cents. On Northern Natural Ventura, Thursday gas changed hands at $4.46, up 11 cents, and at Demarcation next-day gas came in at $4.40, up 9 cents. On ANR SW gas rose 15 cents to $4.24.

Futures observers see the market holding $4.20 support for the time being. "The market blew through a lot of resistance on the way up, but I don't think it will break through $4.20," said Steve Blair, an analyst with Rafferty Technical Research in New York. He also noted that Thursday's super-sized expected triple-digit withdrawal [estimates center around 260 Bcf] hadn't been seen since January 2010.

"That's a huge chunk of gas to come out of storage, and I think a good part of that is already in the market. That alone should keep this market supported even though we are looking at warming temperatures as we head into the weekend."

Market estimates echo Blair's. A Reuters survey of 25 traders and analysts revealed an average 258 Bcf and United ICAP calculates a 265 Bcf pull. Ritterbusch and Associates is looking for a 260 Bcf withdrawal. Last year 70 Bcf was withdrawn and the five-year average calculates at a 133 Bcf pull.

The National Weather Service in its Tuesday six- to 10-day outlook showed a broad fairway of below-normal temperatures bounded on the west by Minnesota and Texas and on the east by a broad arc from New England to northern Ohio to southern Illinois to Louisiana. The Southeast from Virginia to Florida is expected to be above normal along with California and portions of the northern Rockies.

Analysts all agree that Thursday's inventory report will feature a titanic draw, but just how big is a matter of debate. "The consensus view for Thursday's report is still forming, with a wide dispersion of forecasts that is typical of weeks with extreme temperatures," said Tim Evans of Citi Futures Perspective. "Our model projects a net withdrawal of 228 Bcf, but we have seen estimates ranging to 270 Bcf or more, and we'd not be surprised to see the newswire surveys in the vicinity of 250 Bcf.

"While it's clear that heating demand for last week was quite strong and bullish comparisons with both the date-adjusted 70 Bcf draw from last year and the 133 Bcf five-year average will result, we note that high expectations also carry some risk of disappointment. A drop like the 228 Bcf net withdrawal our model is looking for would be clearly bullish on a seasonally-adjusted basis, for example, but would be a bearish disappointment for those penciling in a draw of 250 Bcf or more.

"The market may also have some downside risk associated with the relative warming trend following last week's cold snap that will translate into more moderate storage withdrawals to follow. That said, it looks as though storage levels may continue to decline at least somewhat faster than average over the next few weeks."

Following this week's report Evans is looking for a pull of 147 Bcf for the week ended Dec. 20.

Industry consultant Genscape reported that even sunny California was hit hard by the recent cold incursion. In its Wednesday morning report it said, "California relied heavily on storage to meet the demand spikes in the past two weeks. Storage withdrawals increased by 2.5 Bcf/d month-on-month to 2.6 Bcf/d. Storage inventory level is currently lower than the previous three years and about 90 Bcf lower than the level of the previous year."

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