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California Heat Leads Market Higher; Futures Gain

Physical gas for Tuesday delivery posted a modest advance of a few pennies, but the day's greatest individual gains were seen in California as well as in producing regions that feed the southern California market. Gains overall were widespread, in part mirroring the strong futures, and only a small minority fell into the loss column. At the close of futures trading May had risen 3.7 cents to $4.476 and June had gained 3.5 cents to $4.502. May crude oil fell 70 cents to $100.44/bbl.

Soaring temperatures expected across California prompted double digit moves at some points. "After weeks of cooler temperatures, and even spurts of rain, Los Angeles will experience a warm-up this week with temperatures as high as 15 degrees above normal," according to a report by the Los Angeles Times.

"A 'very large' high-pressure system will bring temperatures into the upper 80s along with off-shore winds from the northeast," the National Weather Service (NWS) said, and "Downtown, for example, will warm to about 87 degrees on Monday before a cooling trend begins after Wednesday." 

"However, the valleys will remain around 86 degrees through Wednesday before cooling off, [and] By Friday, the Southland will be back in the 70s. We haven't had anything like this for a while," said Stuart Seto of NWS.

AccuWeather.com reported that the high Monday of 70 in San Francisco would reach 72 Tuesday before easing to 66 on Wednesday. The normal high in San Francisco is 64. Burbank's 89 high on Monday was expected to reach 90 on Tuesday before dropping to 87 Wednesday. In San Diego Monday's high of 81 was seen reaching 82 Tuesday and falling to 77 Wednesday. The normal early April high in San Diego is 67.

The California Independent System Operator forecast that Monday's peak load of 29,831 MW would rise to 30,847 MW Tuesday.

Gas for delivery Tuesday at Malin rose 4 cents to $4.50 and deliveries to PG&E Citygates added 6 cents to $5.06. At the SoCal Citygates next-day parcels came in at $4.85, up 11 cents and at the SoCal Border gas changed hands at $4.65, up 10 cents also. Gas on El Paso S Mainline rose by 10 cents to $4.67.

Gas headed west on El Paso and Transwestern was also firm. Deliveries to El Paso non-Bondad added 10 cents to $4.45 and gas on Transwestern San Juan gained 9 cents to $4.44.

Points farther removed were mixed. Deliveries to CIG Mainline slipped 2 cents to $4.29 and at the Cheyenne Hub next-day packages climbed 3 cents to $4.43.

In noon updates to the WeatherBell six- to 10-day outlook, a pattern of warming, cooling, and back to normal was seen. "The GFS Ensemble [weather model] nicely captures the overall idea with the warming, cooling, and then less cool back and forth situation," said meteorologist Joe Bastardi.

What was a big surprise, however, was the European Model. "Raising many eyebrows is the ECMWF. Major cold comes down the Plains, then tries to blast the interior east with a late season snowstorm. While there is no way I would buy the details of such a thing, the fact that a run can have the western Great Lakes and the East in a major snow swath means (at the least) some out of season cold is likely to show up for a few days in the 6-10 Day. That should be the main message at this time!"

Double-digit gains were reported at eastern points as well. Gas for delivery to New York City on Transco Zone 6 added 16 cents to $4.47 and deliveries to Tetco M-3 Delivery rose by 12 cents to $4.43. Packages to the Algonquin Citygates, however, were down 1 cent to $4.83.

A California futures trader was optimistic prices have seen the lows for the year. "Prices probably won't trade below $4 this year. I think the lows are in," said a suburban Sacramento broker.

"Storage has come in shallow, and it's the same old thing. It turns from 60 last week to 85 tomorrow, here. It's going to be close to a record. The last thing we need right now is heat, and the water content of the snowpack is only about 32% to 33% according to the [California] Department of Water Resources."

"Anybody who comes to me and thinks about being bearish natural gas, I tell them I will buy your break!"

In spite of the market holding a key support level last week, risk managers see the market working lower and counsel working the short side of the market. "Natural gas settled slightly lower on the week, [but] early in the week, the gas market broke on more seasonal temperatures in the Midwest and Northeast," said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm.

"But when key support ($4.25) held, the gas market rebounded to the prior weeks settlement levels. A larger than anticipated draw [74 Bcf] helped to rally the market mid-week. On a trading basis, we will hold short positions and look for the market to continue to work back toward the $4 level."

DeVooght said trading accounts should continue to hold a short May futures position rolled from an April sale at $5.00 to $5.10, and end-users should stand aside. Producers and those with exposure to lower prices should hold a short May-October strip from $4.20 to $4.30 as well as a second short May-October strip from $4.50.

Forecasters see a warm trend shifting cooler. In its Monday morning six- to 10-day outlook, WSI Corp. showed above-normal temperatures in the West with a ribbon of below-normal temps extending from Minnesota to the Texas Gulf Coast. "Today's six-10 day period forecast has trended warmer over the West, as well as the East early, but colder over the eastern two-thirds late in the period when compared to Friday's forecast and is partially due to a shift in the period in addition to over the weekend model trends.

"Forecast confidence is considered near average standards as models show generally good large-scale agreement with regards to the anticipated pattern evolution. Risk is to the warmer side early across the East under a building warm ridge, but the risk shifts to the colder side over the Plains and Midwest late in the period under a digging cold trough."

Tom Saal, vice president at INTL FC Stone in Miami, in a study of open interest of large noncommerical (spec) traders versus the spot contract shows a strong correlation. He shows the present level in combined open interest of Nymex Henry Hub swaps and futures close to its historical peak of 200,000 contracts along with a commensurate rise in price. Historically, declines in the open interest have lead to lower prices. He said both the open interest and spot price show a rising trend.

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