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Futures, Cash Subside on Record Production, Soft Weekend Weather

Physical gas for Sunday and Monday delivery slumped Friday as weather conditions for the most part were expected to be benign and traders were reluctant to make purchases of gas that might become burdensome and have to be resold.

Only a handful of points made it to the positive side of the trading ledger, and overall most points were within a nickel of a dime's loss. Marcellus points were hit the hardest, but California locations had to endure double-digit losses. The Energy Information Administration (EIA) reported record gross withdrawals in the Lower 48 for March. At the close of futures trading, July had eased 1.7 cents to $4.542 and August was down 1.6 cents to $4.524. July crude oil shed 87 cents to $102.70/bbl.

Sunday and Monday prices slumped across the Great Lakes as weekend warmth was predicted to give way to temperatures closer to normal by Monday. Forecaster Wunderground.com predicted that Friday's high of 86 degrees in Minneapolis would ease to 85 by Saturday and reach 75 on Monday. The seasonal high in Minneapolis is 68. Indianapolis' Friday max of 88 was seen sliding to 85 by Saturday and 81 on Monday. The normal late-May high in Indianapolis is 77. Chicago's forecast was something of a departure from the trend. The high in Chicago Friday of 76 was expected to weaken by 75 Saturday and rise to 79 on Monday. The typical high in Chicago this time of year is 75.

The National Weather Service in Chicago predicted active weather patterns throughout the area, but no major extremes. "A large ridge of high pressure extending from Hudson Bay south to the Great Lakes region will slowly move to the East Coast Saturday night into Sunday. Full late-May sunshine has allowed temperatures to warm into the Lower/Middle 80s away from the lake and the same is expected on Saturday with temperatures a few degrees warmer. Continued onshore flow will keep the immediate Lakeshore areas much cooler.

"By Sunday southerly flow will allow more humid air to spread back into the area with dewpoints climbing into the Lower/Middle 60s. An upper-level wave is prognosticated by all the models to move across the region during the afternoon or early evening."

Gas for Sunday and Monday delivery on Alliance fell 8 cents to $4.52, and parcels at the Joliet Hub eased 8 cents to $4.52. At the Chicago Citygates, gas changed hands at $4.52, also down 9 cents, and on Consumers gas came in at $4.70, down 11 cents. On Michcon, gas was seen at $4.73, down 11 cents.

A Rocky Mountain producer sees little problem with storage refill. "We'll get to 3.5 Tcf, and if it takes $5 gas, so be it," said a Denver producer. "Those eastern utilities are going to buy gas. They often are on set marching orders from their public utility commissions that by the end of April, May and June they have to have a set percentage of their storage requirements in the ground."

The producer said the real development on the day was the report by the EIA of record gross production in the Lower 48 for March. EIA said gross withdrawals increased to 76.68 Bcf/d, up 1.6% from February and up 4.3 Bcf/d from a year ago or an astounding 6%.

"Keep in mind we have lost some production in Q1 due to freeze-offs. I don't have any doubt we will get to 3.5 Tcf," he said.

Gas in the Midcontinent came in a nickel to a dime lower. Gas on ANR SW was off 11 cents to $4.31, and deliveries to Northern Natural Gas Ventura fell 4 cents to $4.48. Packages at Demarcation were down 6 cents to $4.48, and at the NGPL Midcontinent Pool gas for Sunday and Monday delivery fell 9 cents to $4.36. On OGT, gas slipped 5 cents to $4.18, and on Panhandle Eastern parcels were seen at $4.19, down 4 cents.

Marcellus points were the hardest hit. Deliveries on Transco Leidy fell 23 cents to $2.08, and on Tennessee Zone 4 Marcellus weekend and Monday gas shed 28 cents to $2.06.

The day's lackluster performance by futures failed to dampen analyst's near-term bullish stance. "We were not surprised by [Friday's] additional selling, but we would continue to advise purchases of nearby futures on a scale down within the $4.40-4.50 zone," said Jim Ritterbusch of Ritterbusch and Associates. "While we don't expect violation of this week's highs of about $4.66 in next week's trade, a test of such could easily be forthcoming off of any weekend shifts toward warmer temperature expectations.

"Although [Thursday's] response to a seemingly bearish EIA storage figure was less pronounced than we expected, it did manage to bring a halt to this week's price rally, and while the market failed to sell off as much as we desired in our attempt to establish fresh longs, we remain resolute in a bullish near-term stance.

"A limiter on [Thursday's] selling appeared to be some warm weather forecasts, especially across next week, that will likely be translating to a downsized storage injection to be issued two weeks from today. As a matter of fact, [Thursday's] build [report] likely represented the largest injection when looking across the next several months. Preliminary weather indications point toward a modest downsizing in next week's build."

Market technicians see a compelling case for near-term weakness based on what they see as a lackluster performance off Thursday's inventory report.

"It was a constructive day for the bears, but far from convincing at this point. Natural gas tested the upside and failed miserably," said Brian LaRose, technical analyst with United ICAP in a Thursday evening webcast. "Given the nature of the price action, I would much rather take a short position and work a buy-stop above $4.665. I think that is the safest play at this point given the seasonal cycle.

"If we can recoup [Thursday's] losses and take out [Thursday's] high [$4.665], then I see no reason why we can't test the previous highs around the $4.80 to 4.90 area, but clearly there is potential for further downside here."

LaRose bases much of his premise of a near-term decline on Elliott Wave analysis. He sees the price action up from the late March $4.289 low resembling a completed A,B,C bear market correction (up, down, now up) with a potential decline to a seasonal cycle low looming. "We need to be extremely concerned for when we look at the June and July contracts we can't be confident that a market bottom has been put in place."

He said that one more further push down would be consistent with the seasonal cycle pattern. "Generally speaking, we are looking for an August-September bottom before the next big run up begins. Who is to say it might not start early and that would be the bullish case here."

In its Friday morning 20-day forecast, WeatherBELL Analytics is looking for a cool pattern. It calculates modest heating degree day requirements below last year and the 30-year average. "There is great model agreement now, which if correct, would mean our June idea is on target," said Joe Bastardi, WeatherBell meteorologist. "I, for one, am a bit concerned for if I am going to say the orbit of the MJO [Madden Julian Oscillation] into the current phases argued for the coming cooling, last night's MJO forecast...makes me concerned that it could be too cool in the longer term (Days 15-30). It better be, anyway, because it is colder in the 30-day mean than our monthly forecast. For now, the reversal to the cooler national pattern next week and beyond is well seen on all models."

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