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Bidweek Finds Marketers Locking In May; Utilities Refilling Storage

For utilities and those with storage facilities severely depleted by the ravages of a vortex-driven winter, May indices offered the opportunity to refill at what could be a relative bargain. Despite large declines in the Northeast and Midwest, NGI's May National Bidweek Average rose a nickel over April to a modest $4.48. Individual market points in the East fell the most with Algonquin Citygate dropping $1.60 to average $4.60 and Tennessee Zone 6 200 L dropping $1.56 to $4.70. Marcellus Shale pricing points, with their unique abundance of supply and capacity constraint issues, rose the most with Transco-Leidy Line gaining 64 cents to $3.44 and Tennessee Zone 4 Marcellus rising 79 cents to $3.42.

Regional bidweek quotes dropped the most in the Midwest sliding 24 cents to average $4.92, followed by the Northeast easing 4 cents to $4.08. At $4.08 the Northeast holds the distinction of being the region with the lowest NGI May index as regions shuck and jive to the new realities of producing-region/consuming-region production and transportation.

The Midcontinent was up 5 cents to $4.45, but all other remaining regions posted double-digit gains. The Rocky Mountains added 16 cents to average $4.48, and South Louisiana and South Texas each rose by 19 cents to $4.75 and $4.68, respectively.

East Texas was up by a stout 20 cents to $4.69 and California prices gained 22 cents to $4.90.

May futures expired Monday at $4.795, up 21.1 cents from April's expiration at $4.584 a month earlier. Those looking for price direction cues over the next few months best be monitoring the nation's storage situation pretty closely. After more than 3 Tcf was removed during the brutally cold 2013-2014 winter heating season, the race -- and the bets -- are on as to whether domestic production can muster the push necessary to refill inventories prior to next winter. While Thursday's bearish 82 Bcf injection report for the week ending April 25 was a step in the right direction towards completing the goal, the road to 3.5 Tcf is still a long one.

In early bidweek trading a Great Lakes marketer was formulating plans and was thinking of reversing his April strategy of floating with the market and going with a much higher percentage of index-priced gas for May. "We aren't seeing any days much above 70 for May," said a Michigan marketer. The marketer also voiced concerns that storage refill was not going very quickly and could lead to higher prices.

By mid bidweek observers noted that index-based buying for May should be less focused on the likelihood of prices moving higher than restoring depleted inventories. Utilities, more removed from the vicissitudes of the market were more likely to use bid week simply as an opportunity to buy more storage gas. "You need to treat your storage like a market, like you are going to burn it," said a Houston-based industry veteran.

"You are buying gas to stick it in the ground at a price, You are not just going long, you are buying gas to put into storage for your account which needs to be rebuilt." He noted that injections for May were likely to begin in earnest. "Some of those pipes like Nicor and Northern Natural you don't start injecting as a utility until May anyway. April the further north you go is more of a turnaround, and the first two weeks of April are considered possible withdrawal months."

A Rockies producer told NGI that his company's May bidweek dealmaking had been pretty quiet as it has 70%-plus of its gas hedged. He added that prices remain depressed due to too much gas.

With the development of the Marcellus and Utica shales, Rockies Express Pipeline LLC (REX) has been gauging interest in reversing certain flows on its cross-country system from west-to-east to east-to-west. After receiving upwards of 5.5 Bcf/d in shipping interest from Appalachian producers during a nonbinding open season launched in January for its east end backhaul from Ohio to Illinois, REX announced a binding open season through Wednesday (May 7)  for the 1.2 Bcf/d it has available on the stretch. The capacity at the east end of the 1,698 mile pipeline, or Zone 3, which gives producers in the Appalachian Basin east-to-west access to growing markets in the Midwest, is expected to increase.

Looking ahead at prices, the Rockies producer said all eyes in the market are currently on the storage situation. "The next few storage reports are going to be pretty important to the gas market," he told NGI. "We'll start to get a better picture of whether or not we're filling fast enough to get to 3.5 Tcf by Nov. 1. If we're not on that track, prices will go up until we back off enough demand from the power sector to fill storage."

That said, the producer noted that some of the recent bullish price forecasts are works of fantasy. "First off, I am pretty bearish here, because production is coming from everywhere, whether it be the Marcellus, Utica, Eagle Ford, Permian or somewhere else," he said. "Now, if things align right, we could certainly see $5 gas, but some of these new forecasts for $5.75-6.00 gas are really out there in my opinion. We've just got too much gas being produced."

As for the other side of the coin, he said the storage picture is key. "If we see two triple-digit storage injections before Memorial Day, then prices are going to probe $4 or below pretty quickly," the producer said.

"The natural gas market is coming under selling pressure as the weather outlook continues to trend in bearish fashion, as heating demand tapers off and cooling has yet to offset the decline," Evans said. "Storage remains tight after a cold winter, which may limit the decline, but we continue to see significant risk of a cycle of long liquidation, with a break in temperatures triggering a break in price."

Driven by the new realities of production and consumption of natural gas in the Northeast, and with the onset of the shoulder season, market-watchers would be wise to observe a new trend identified by NGI, where low gas demand and plentiful supply from nearby shale basins have triggered key northeastern pricing points to begin trading at a sometimes steep discount to the Henry Hub.

For example, Transco Zone 6 NY -- for the second multiple-day period since NGI began tracking the point in 1998 -- is currently trading below the Henry Hub. NGI's Transco Zone 6 NY next-day gas index has traded at a discount to the Henry Hub during 19 of the last 22 days, with the largest deficit coming in on April 14 at a $1.08 discount. The only other time this phenomenon was observed in the last 16 years was last summer, when Transco Zone 6 NY recorded a number of discount days through the shoulder season and into early January, only to be stopped by the string of polar vortices, which spiked prices.

"Transco Zone 6 New York is now trading below Florida Zone 3 as well as the Henry Hub," said a Florida utility buyer. He laid the newly developing differential at the feet of New York City being in effect almost a producing zone market point rather than a remote consuming market historically distant from supply.

"Every industry conference you go to you get inundated with the [forthcoming] ability to move [more] gas out of the Marcellus and go directly to the Northeast." Weather driven price spikes notwithstanding, a producer with Marcellus gas would be better served moving his gas to Florida Zone 3 or the Henry Hub if it were possible.

The Florida utility buyer lamented that he was "really out of it" in terms of being able to move gas out of the Marcellus to his market. "We have [transportation] off Transco Zone 4, but Transco Zone 5 and Zone 6, I am really out of it. The way we get Marcellus gas is off the Columbia Gulf system, but we are really trapped in the Southeast."

Transco Zone 6 NY traded at a negative basis to the Henry Hub for at least one day in 11 of the last 12 months. April 2014 marked only one of two months in the past year when the average daily basis differential was negative.

May bidweek proved the Northeast's discount to the Henry Hub. May gas at Transco Zone 6 NY came in at $4.03, 78 cents below the Henry Hub's $4.81.

In spite of the current Transco Zone 6 NY discount, the buyer said he sees a flattening of gas prices from the Gulf to the Northeast as greater LNG export capability is developed. "These hubs will have ability to liquify and compress and will bring gas down from the Marcellus. All the gas [market points] are going to start being very flat to one another. If we start exporting, I think there is going to be parity between the pipes."

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