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Strong June Expiration Leads Physical Market Higher; Futures Add 11 Cents

Physical natural gas for Thursday delivery rose again in screen-directed trading on Wednesday. Nearly all points saw gains from a nickel or more in the Gulf to double-digit advances in the Great Lakes, Marcellus, Mid-Atlantic and Appalachia. There was little weather inspiration, and much of the gains mirrored the gains posted by the expired June futures contract. At the close June had settled at $4.619, up 11.4 cents, while July finished 10.4 cents higher at $4.615. July crude oil tumbled $1.39 to $102.72/bbl.

The physical markets took much of their guidance from the expiring June contract as near-term weather-driven power and heating loads look to be minimal. The National Weather Service for the week ended May 31 forecasts below-normal accumulations of aggregate heating and cooling degree days for major metropolitan areas. New England is expected to see 32 heating degree days (HDD), or six fewer than normal, and the Mid-Atlantic is expected to warm to just 11 HDD, or 16 fewer than normal. The greater Midwest from Ohio to Wisconsin is forecast to feel just three HDD, or a hefty 29 fewer than normal.

Cooling degree days (CDD) isn't all that impressive either. New England should experience just six CDD, or two more than normal, and the Mid-Atlantic is set to see 12 CDD, or one more than its normal tally. The Midwest should live through 37 CDD, or 18 above normal. Combining HDD and CDD differentials, all regions come up short of normal. New England is four total degree days below normal and the Mid-Atlantic is 15 degrees off its normal pace. The Midwest is less than its normal degree-day accumulation by 11.

In the Midwest and Great Lakes, there was little weather-driven motivation to buy gas as temperatures hovered at or slightly below seasonal norms. Wunderground.com reported that the high Wednesday in Chicago of 62 was expected to hold for Thursday and rise to 69 by Friday. The seasonal high is 74. Detroit's 69 high Wednesday was forecast to rise to 74 Thursday and reach 79 by Friday. The normal high in the Motor City is 75.

Gas for Thursday delivery at the Joliet Hub added 10 cents to $4.61, and gas on Alliance was quoted 10 cents higher at $4.61. Deliveries to the Chicago Citygates added 10 cents to $4.61, and packages on Consumers advanced 11 cents to $4.77. Gas on Michcon was seen at $4.78, up 13 cents.

TheNGI Bidweek Alert revealed the basis at Chicago Citygates ranging from seven cents to 10.5 cents, and the basis on Consumers was quoted from 16 cents to 22 cents. Michcon Basis came in at $0.19 to $0.24.

A Michigan marketer said his company was doing very little buying and just trying to keep customers balanced for the end the month. "We expect to start building up our customers storage next month. We were able to buy on Consumers at $4.79," he said.

Marcellus and Mid-Atlantic points gained upwards of a dime. Gas on Transco Leidy for Thursday came in at $2.36, up 9 cents and deliveries on Tennessee Zone 4 Marcellus gained 15 cents to $2.49.

In Appalachia quotes came in about a dime lower. Columbia Gas TCO rose 12 cents to $4.53 and deliveries on Dominion South added 9 cents to $3.31.

The June futures expired at $4.619 and posted the third gain in as many days. The June and July contracts both finished at the upper end of the day's range, a clear short term bullish omen, and for the most part ignored market expectations of a third triple-digit storage build report when the Energy Information Administration releases its report at 10:30 a.m. eastern on Thursday.

Last year 89 Bcf was injected and the five-year pace stands at 93 Bcf. For the week ended May 23, analysts at United ICAP calculate an increase of 113 Bcf and Tim Evans of Citi Futures Perspective is looking for an increase of 110 Bcf. Ritterbusch and Associates is expecting a build of 115 Bcf.

As shoulder season weather continues analysts see what would otherwise be robust injections tempered by demands from the power generation sector. "[W]hile the pace of restocking would accelerate, even the heaviest weekly injections ahead will likely disappoint given the increased competition with electric power demand," said BNP Paribas’ Teri Viswanath, director of commodity strategy for natural gas.

"Perhaps the most important contribution to resilient utility summer demand is the structural change in dispatch,” she said. “Since 2008, 25.5 GWs of coal capacity has been retired. Between now and the end of 2015, this figure will double as units are idled in advance of the implementation of new federal regulations. Many of the units that have, or will be, retired played a critical role in serving either mid-merit or peak load obligations. The removal of these units from the stack has significantly favored the operation of natural gas-fired generators."

Traders were anticipating a strong finish by the June contract. "We still see a stout physical trade as capable of forcing June to a premium against July futures by day's end, and we would view such a development as a bullish portent," said Jim Ritterbusch of Ritterbusch and Associates in a Wednesday note. "However, we feel that sustaining [Tuesday’s] upward price momentum much beyond the $4.55 level could be challenged by an unusually large storage injection of around 115 Bcf” within Thursday’s Energy Information Administration (EIA) guidance.

"Our figure is at the high side of preliminary expectations that thus far range from about 105 to 115. And as has been the case following the recent EIA releases, an outsized downside price reaction could easily be seen. With this in mind, traders may consider taking some partial profits on a possible lift to above the $4.55 level today with the intention of re-establishing longs later on a price pullback to around $4.40 or lower."

Tom Saal, vice president at INTL FC Stone, in his work with Market Profile calculated Tuesday's value area at $4.503 to $4.435, but he looks for the June contract to "trade a little higher" upon Wednesday's expiration. He also notes an area of minus development above the value area that could prove to be a trading objective. "Minus development is a pricing area 'to be filled in' to complete a normal (bell curve) distribution. Although the June 14 contract expires today, the July 14 contract has a similar pattern. Buyers be ready," he said in a Wednesday note to clients.

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