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Cash, Futures Join in Broad Decline; July Off 2 Cents

Physical natural gas for delivery Thursday slipped lower Wednesday, with most points dropping about a nickel to a dime. Next-day prices on New England pipes fell the most after posting $1.00-plus gains in Tuesday's trading. Isolated strength was seen at Marcellus points, and gas at Mid-Atlantic points fell more than a dime.

Natural gas futures continued their lackluster performance for this week with July losing 2.2 cents to $4.508 and August skidding 1.9 cents to $4.504. July crude oil showing an uncharacteristic lack of volatility added just 5 cents to $104.40/bbl.

Deliveries to New England points may be cut further as Algonquin Gas Transmission has determined more investigations are needed on certain portions of the pipeline, it said Tuesday.

"Algonquin's maintenance on its 30-inch mainline is affecting its ability to carry gas into New England and caused a price increase at Algonquin Citygate price hub," said industry consultant Genscape Inc. "While conducting its previously posted DOT [Department of Transportation] mandated Pipeline Integrity Program, Algonquin determined that further detailed investigations are required on its 30-inch mainline L30B from the Stony Point to Cromwell Compressor Station.” This work would reduce capacities on mainline until Monday (June 16).

"Capacity through Stony Point will be reduced to 570,000 Dth/d, Southeast will be reduced to 550,000 Dth/d, and Cromwell will be reduced to 400,000 Dth/d,” said Genscape. “These compressors have been flowing an average of 1.1 Bcf/d, 1.1 Bcf/d, and 677,000 Dth/d respectively over the past 30 days."

Moderate weather forecasts may help alleviate the impact of reduced capacity. Wunderground.com reported mild conditions along the Eastern Seaboard. Boston's 65 high on Wednesday was forecast to reach 70 Thursday before hitting 75 Friday, the normal for this time of year. New York City's 70 high on Wednesday was seen making it to 75 Thursday and 79 Friday; seasonal temps are about 78. Farther south in Washington, DC, Wednesday's warm of 87 was expected to drop to 84 Thursday and climb back to 85 on Friday. The normal mid-June high in DC is 83.

Weather along the East Coast is expected to be active, though not necessarily conducive to high cooling loads, or for that matter, much in the way of any cooling load. The National Weather Service in Baltimore reported that  "a backdoor cold front will stall out over northeastern Maryland” through Wednesday night. “The boundary will dissipate Thursday while an upper-level trough builds overhead. The trough will remain overhead Friday before a cold front moves through Friday night. The cold front will stall to the south Saturday before returning  north as a warm front Sunday. High pressure will remain along the middle- Atlantic coast.”

Between the active weather, moderate temperatures and reduced deliveries, prices at New England points retreated. Gas at the Algonquin Citygates slipped 42 cents to $4.80, and deliveries on Tennessee Zone 6 200 L were off 42 cents to $4.44. Gas at Iroquois Waddington dropped a nickel to $4.72.

Prices in the Mid-Atlantic fell, but gains were seen at Marcellus locations. Gas for delivery into Transco Zone 6 NY shed 12 cents to average $3.28, and gas delivered on Tetco M-3 also skidded 12 cents to $3.25. On Transco, Leidy packages for Thursday delivery rose 11 cents to $2.76, and on Tennessee Zone 4 Marcellus next-day gas changed hands at $2.54, which was flat to Tuesday’s trade.

In the producing regions, prices were mostly lower. On ANR SE, next-day gas was seen at $4.46, down 5 cents, and on Transco Zone 3 Thursday parcels came in at $4.49, down 6 cents. At the Henry Hub, gas was quoted at $4.50, down 7 cents, and on Tennessee 500 L, gas shed 7 cents to $4.46.

Futures traders see the recent string of declines continuing through Thursday's trading, with the Department of Energy’s (DOE) Energy Information Administration set to release the latest storage figures at mid-morning. "With the number coming out [Thursday], I think traders will try to push the market lower, and $4.40-4.37 is probably a good bottom for this market over the next week or two," said a New York floor trader. "I'm looking for a range of $4.40 to $4.70 over the next few weeks."

Estimates of Thursday's storage build are deep into triple digits and well above seasonal norms, but if the futures trader observation's are correct, that number has already been factored into the market. Last year 97 Bcf was injected and the five-year average is for an 88 Bcf build.

Houston-based IAF Advisors is expecting a 109 Bcf increase and United ICAP calculates a 121 Bcf build. A Reuters poll of 22 traders and analysts showed a sample mean of 110 Bcf with a range of 101 Bcf to 117 Bcf.

Analysts saw Tuesday's drop as a case of tired longs bailing. "Natural gas futures fell for a second day on Tuesday, with apparent long liquidation knocking 11.5 cents (2.48%) off the nearby July contract to $4.530/MMBtu settlement," said Tim Evans of Citi Futures Perspective. "The market began this downswing as a correction to last week's rally in the face of weeks of above-average storage injections, but it may have gotten an extra push to the downside after the DOE Short Term Energy Outlook showed May dry gas production reaching a new record of 69.49 Bcf/d, an increase of 3.17 Bcf/d (4.8%) from a year ago.

"Growth in supply for last month was more than double the corresponding 1.46 Bcf/d (2.6%) year-on-year increase on the demand side of the market and suggests that the bearish storage trend of the past two months may well continue, at least in the absence of intense heat this summer."

Evans forecasts a build of 114 Bcf in Thursday's storage report and looks for subsequent three-digit gains for the two weeks following. By June 27, he sees the five-year "surplus" down to an 805 Bcf deficit. The five-year deficit currently stands at 896 Bcf.

Market technicians saw Tuesday's decline as re-invigorating the case for a continuation of a longer-term down trend. "With natgas crashing through $4.636, the case for a completed ABCDE rising wedge has gained some serious traction," said Brian LaRose of United Energy in closing comments Tuesday. A rising wedge is a bearish chart pattern that signals the recent trend, which took July as high as $4.743 on Monday may be over. "But bears still have work to do. To confirm the down trend has been restored, $4.386-4.359 must now be broken. Accomplish this and the A=C objectives from $4.877 (July contract) will be our downside targets. a=c cuts at $4.163. 1.618 a=c is down at $3.805."

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