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East Natural Gas Cash Strength Counters Weak Marcellus; Futures Inch Higher

Physical natural gas prices for Tuesday delivery gained ground in Monday's trading with double-digit advances in the Northeast leading the pack higher. Those gains were able to offset declines in the Marcellus and flat trading at Midwest points. California locations also rose. At the close of futures trading June had risen 1.4 cents to $4.688 and July was higher by 1.1 cents to $4.715. June crude oil declined 28 cents to $99.48/bbl.

New England next-day prices saw the largest increases as demand reached peak pipeline capacity. Iroquois Gas Pipeline reported that for gas day May 6, "receipt nominations are at capacity and sealed from further increases in receipt quantities" for interconnects with Algonquin Gas Transmission, Tennessee Gas Pipeline, and Dominion Gas Transmission. Iroquois said that "Customers will be advised if further capacity becomes available during the day as volumes are nominated and confirmed."

Industry consultant Genscape said that New England demand was up 9% day on day from 2.0 Bcf/d to 2.2 Bcf/d.

Gas at the Algonquin Citygates rose by 94 cents to average $5.00 and deliveries to Iroquois Waddington gained 19 cents to $4.90. On Tennessee Zone 6 200 L next-day gas added 61 cents to average $4.79.

The National Weather Service in southeast Massachusetts reported that "high pressure north of the Great Lakes slowly builds into New England through Wednesday...providing dry and seasonable weather with mild days and cool nights. Then a period of unsettled wet weather is expected for the end of the week into the weekend."

Wunderground.com reported that Boston's Monday high of 64 was forecast to drop to 61 Tuesday and reach 63 Wednesday. The normal high in Boston is 63.

In the Mid-Atlantic prices were also firm. Gas bound for New York City on Transco Zn 6 rose 18 cents to average $4.13 and deliveries to Tetco M-3 Delivery added 19 cents to $4.09.

In the Marcellus packages on Transco Leidy fell 18 cents to $3.62 and gas on Tennessee Zone 4 Marcellus was off 17 cents to $3.58.

California next-day prices rose even though total demand fell and storage operators stepped up their injections over the weekend. According to Genscape "California demand decreased to 4.1 Bcf/d for Saturday and 4.0 Bcf/d for Sunday. The weak demand gave storage operators the opportunity to inject gas into the ground. Injection reached 2.2 Bcf/d for the weekend compared to the average of the past 30 days of 1.5 Bcf/d."

Genscape added that "California storage inventory is currently about 130 Bcf lower than the same time of 2013 and 200 Bcf lower than the historical maximum. Assuming storage operators continue to inject through every day of this summer, it would take an injection rate of 1.2 Bcf/d to fill up to last year’s end of summer level."

Gas for Tuesday delivery at the PG&E Citygates rose 6 cents to $5.23 and gas at the SoCal Citygates was quoted at $5.02, up 14 cents. Packages at the SoCal Border gained 9 cents to average $4.82, and gas on El Paso S Mainline changed hands at $4.87, up 11 cents.

Kansas may not be a heavily populated market area, but if recent weather conditions there are any indication of what is to come for the Midwest, it could be a tumultuous summer. "On Sunday, May 4th, the temperature peaked at 102° at Wichita’s official NWS site Mid-Continent International Airport," said weather historian Christopher Burt. "Not only was this the hottest temperature ever measured during the month of May (previous record was 100° set on four different occasions) but was the earliest 100° reading on record (previous was May 9, 2011) and hottest reading so early in the season by a whole month: since June 4, 1933 when 102° was also observed. The city is off to its 2nd driest start of the year on record as well. In addition he noted that just two days previously, on May 2nd, the temperature fell to 35°, only 2° shy of the daily record low temperature of 33° set in 2005."

Next-day prices in the Midwest and Great Lakes moved little. At the Joliet Hub next-day gas came in at $4.78, unchanged, and deliveries on Alliance were seen up a penny to $4.79. At the Chicago Citygates next-day parcels traded at $4.78, down 2 cents, and on Consumers Tuesday gas was seen at $4.89, up 2 cents.

Analyst Alan Lammey of WeatherBELL Analytics sees the U.S. natural gas industry as "at last quickly transitioning toward a more seasonably familiar 'shoulder period.' As such, weekly gas storage data should start to reply to the tame weather conditions across the nation via by larger weekly gas storage builds. This should, in theory, place some downside pressure on prices in the near term -- but this will be absolutely dependent upon the results of the weekly storage data, and of course, changes occurring in the weather patterns for the next few weeks."

Lammey sees the combined 14.1-cent drop in the June contract as "all about the changing sentiment toward gas storage. While last week's storage data was less concerning than the previous weeks in terms of being smaller builds, the overall build still wasn't adequate to refill stocks to comfortable levels. There are now 26 gas storage 'injection weeks' left to go until the start of next withdrawal season. In order for the U.S. natural gas market to achieve its storage goal of 3.5 Tcf by Nov. 1st, which is about the least amount of gas storage psychological 'comfort level' for winter, another 2,519 Bcf of working gas must be injected. For this target to be attained, weekly storage injections must average 97 Bcf per week through October," he said.

That level of injections may be challenged by gas usage to offset nuclear plant shutdowns. "According to Nuclear Regulator Commission data, out of 100 active U.S. nuclear reactors; 17 reactors are in complete shutdown mode, which means the reactor is producing zero megawatts (MW). There are 10 reactors in partial shutdown and 73 nuclear power plants that are operational. Currently, there are about 19,370 MW of nuclear power shutdown for maintenance with an estimated natural gas replacement burn rate of about 3.9 Bcf/d in order to generate an equal amount of electricity," he said.

Risk managers see an opportune time for producer sales. "Fundamentally, it has been our feeling that the natural gas market is becoming much healthier than it has been in quite some time. But the mending process will occur over a long period of time," said Mike DeVooght of DEVO Capital Management. "The fact that natural gas rig activity has been slipping is supportive, but the lack of any significant demand upticks, is negative. On a trading basis, we feel selling the Summer above $4.50 for producers is an attractive selling level. It could be that in the future the mid to high 3s will be the new floor on the breaks. We will continue to hold our current short positions for hedges." The summer strip settled Friday at $4.687, according to DeVooght.

WSI Corp. in its morning six- to 10-day outlook shows temperatures a touch warmer. "[Monday's] six-10 day forecast is generally warmer than Friday's forecast over both the East and West Coasts. The south-central states look a bit cooler but is due to a shift in the period. Confidence in the forecast is considered near average standards as models show reasonably good large-scale agreement during the period."

Risks to the forecast include warmer temperatures in the East "under a building warm ridge. There are some colder risks to the forecast over the coastal Northeast if a backdoor cold front is stronger than anticipated mid period. Slight colder risks are also in store for the desert Southwest early if a Pacific trough pushes further southward than anticipated."

WSI forecasts the high Monday in New York of 67 will slip to 66 Tuesday and 63 Wednesday. The seasonal high is 67. Chicago's Monday high of 55 is seen rising to 62 Tuesday and 81 on Wednesday. The normal early May high in the Windy City is 68.

Tom Saal, vice president at INTL FC Stone in Miami, in his work with Market Profile is looking for the market to test last week's value area at $4.840 to $4.742. He then expects a test of $4.636 to $4.542.

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