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Physical Market Plays Catch-Up While Futures Consolidate; July Sheds 2 Cents

Spot gas for weekend and Monday delivery staged a broad rally Friday as the physical market played somewhat of a catch-up to the screen's Herculean 25-cent leap on Thursday.

Most points came in with double-digit gains, and only a handful of locations slipped into the loss column. Northeast locations were particularly strong, but gas out of the Marcellus Shale came in noticeably lower. Appalachia quotes were firm, but Mid-Atlantic prices were mixed. At the close of futures trading, July settled for something of a disappointing loss of 2.3 cents to $4.739 and August had retreated 1.5 cents to $4.748. July crude oil gained 38 cents to $106.91/bbl.

Pipeline maintenance at Northeast points prompted the day's greatest gains, boosting quotes well above the overall average. "Capacity reduction due to Algonquin's maintenance on its 30-inch Mainline started on Tuesday and is expected to be completed by Monday. Algonquin Citygate prices have been trading higher due to the decreased flow into the New England area," said industry consultant Genscape.

"Due to this maintenance, AGT [Algonquin Gas Transmission] has restricted interruptible, secondary out of path nominations that exceed entitlements, secondary out of path nominations within entitlements, secondary in path and approximately 38% of primary firm nominations sourced from points west of its Southeast Compressor Station (Southeast) for delivery to points east of Southeast. Flow through Stony Point dropped from 1131 MMcf/d before the maintenance to 528 MMcf/d [Friday]. Flow through Southeast compressor station dropped from 1,112 MMcf/d before the maintenance to 518 MMcf/d [Friday]. Flow through Cromwell dropped from 648 MMcf/d before the maintenance to 296 MMcf/d [Friday]."

Quotes for weekend and Monday gas at the Algonquin Citygates jumped 55 cents to $4.64, and gas at Iroquois Waddington was seen 14 cents higher at $4.80. Deliveries to Tennessee Zone 6 200 L gained a stout 37 cents to $4.27.

Quotes in Appalachia and the Mid-Atlantic were higher to mixed as active weather was seen for the area. The National Weather Service in Baltimore reported that "an upper trough will remain over the area for much of [Friday]...before a cold front sweeps the warm and humid air mass off the coast [Friday night]. High pressure will settle over the area Saturday...then shift off the East Coast next week leading to a return of warm and humid conditions."

Temperatures were close to if not a little above normal. Wunderground.com reported that Boston's Friday high of 64 would reach 75 Saturday before advancing to 79 Monday. The seasonal high in Boston is 75. Albany, NY's 72 high on Friday was seen climbing to 75 Saturday and making it to 86 on Monday. The normal mid-June high in Albany is 77. Baltimore's 82 high on Friday was expected to ease to 78 on Saturday and then rise to 83 on Monday. The normal high in Baltimore this time of year is 83.

Deliveries to New York City on Transco Zone 6 slipped 7 cents to $3.09, but weekend and Monday gas on Tetco M-3 added 2 cents to $3.14. Gas on Columbia TCO rose 16 cents to $4.60, and parcels on Dominion South were seen up a nickel to $3.15.

The Marcellus was one of the few locales posting a loss. Gas for delivery over the weekend and Monday on Transco Leidy slumped 30 cents to $2.00, and packages on Tennessee Zone 4 Marcellus shed 20 cents to $1.90.

Futures traders are still optimistic in spite of Friday's lackluster settlement. "I think a settlement above $4.75 would have positioned the market for a move to $5 by next week, but it didn't happen. Two days of gains would have indicated good movement to the upside," said a New York floor trader.

He indicated that with the storage number for next week likely to induce another surge of volatility, $5 was easily within reach.

Analysts see continued tightening in the supply-demand balance. "Despite the mild weather, deep cash discounts in the Northeast are supporting electric power demand and limiting the region's inventory restocking effort," said Teri Viswanath, director of commodity strategy for natural gas at BNP Paribas. "According to our analysis of the interstate pipeline deliveries, the month-to-date electric power demand in the Middle-Atlantic states appears to be running roughly 0.3 Bcf/d higher than year ago levels or on pace to the 2012 record burns. Accordingly, this demand competition is limiting the inventory restocking effort in the East Consuming region, with weekly injections falling short of the five-year maximum reported levels.

"All told, we see supply-demand balances continuing to tighten, limiting the industry’s progress in paring the y-o-y storage deficit."

Figures from Baker Hughes aren't helpful to the cause of improving the storage deficit. The firm said Friday that the number of gas-directed rigs operating in the United States fell by 10 this week to 310. Horizontal rigs, those commonly associated with the active shale plays fell by two to 1,248, the firm said.

Traders saw Thursday's Titanic advance due to not only a bullish storage report, but also prompted by turbulence in the petroleum sector. "Prior to the issuance of the [storage] report, we would have viewed an injection of 107 Bcf as worth a price advance of about 8-10 cents," said Jim Ritterbusch of Ritterbusch and Associates in closing comments Thursday to clients.

"[Thursday's] excess beyond this expectation appeared driven by aggressive short-covering after some minor chart points were violated. Additionally, some forecasts are beginning to shift in the direction of some warming temperature patterns, and some buying spillover from the oil was apparent. Regardless, we still feel that the supply deficit will need to be cut much more before supply worries ease enough to enable significant downside price follow-through.

"Obviously, some large funds are trading this market from both sides and contributing to elevated late-week price volatility. Just as this week's selloff exceeded our expectations, [Thursday's] advance also proved much more than we had anticipated. At the end of the day, we still view this market as one that needs to be worked strictly from the long side."

Weather forecasts called for a Midwest cooling in the six- to 10-day period. In its Friday morning outlook, MDA Weather Services said, "The first half of the period progressed well from [Thursday] with a round of heat and humidity still playing out of the East back into the eastern Midwest before an expected cool-down.

"This cool-down comes with greater intensity and focus in the East today where model trends suggest high pressure descends southeast from Canada, bringing a cold front through the Great Lakes and Midwest to East mid to late period. While the East trends a bit cooler the central U.S. shifts warmer late in the period as another round of active weather moves in and quickly overpowers the cool air."

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