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Skewed Physical Market Posts Overall Gain; Futures Fumble Once Again

Trading for Tuesday deliveries saw a greater number of physical natural gas points in the loss column on Monday, but outsize gains in New England, the Mid-Atlantic, and Marcellus shifted the overall average increase to 12 cents. Many points in the producing regions were down by a few pennies to 5 cents or more.

Futures elected to head south, and at the close July had fallen 8.5 cents to $4.446, and August was off 8.4 cents to $4.468. July crude oil retreated 66 cents to $106.17/bbl.

Forecasts of warmer temperatures along with expectations of higher power usage along the Eastern Seaboard provided a solid floor to lift next-day gas prices. The National Weather Service (NWS) in southeast Massachusetts said high pressure would move offshore into Tuesday, “resulting in a gradual increase in temperature and humidity. A cold front will bring scattered showers/thunderstorms for a time Wednesday into Thursday [and] uncertainty remains in threat for more showers late in the week and the weekend."

Forecaster Wunderground.com predicted that Boston's Monday high of 77 would reach 83 Tuesday and 85 by Wednesday, seven degrees above the seasonal norm. New York City was expected to see its Monday maximum of 82 ease to 80 on Tuesday before hitting 83 Wednesday; the normal high this time of year is 81. Philadelphia's peak of 85 was seen rising to 87 Tuesday and 88 Wednesday. The normal late June high in Philadelphia is 82.

IntercontinentalExchange reported that peak Tuesday power at Nepool rose $3.63 to $41.15/MWh and next-day peak power at PJM was seen at $53.33, up $9.74.

New England ISO forecast that Monday's peak load of 17,600 MW should rise to 17,700 MW Tuesday and 19,180 MW Wednesday.

In addition, Algonquin Gas Transmission (AGT) notified shippers that deliveries to its Burrillville Compressor Station would be subject to constraints. Nominations were above AGT's capacity.

"AGT has restricted interruptible and approximately 53% secondary out of path nominations that exceed entitlements sourced from points west of its Burrillville Compressor Station (Burrillville) for delivery to points east of Burrillville. No increases in nominations sourced from points west of Burrillville for delivery to points east of Burrillville, except for Primary Firm No-Notice nominations, will be accepted," it stated on its website.

Tuesday deliveries to Algonquin Citygates jumped 53 cents to $3.36, and gas at Iroquois Waddington jumped 79 cents to $4.68. On Tennessee Zone 6 200 L, next-day parcels changed hands at $3.44, up 53 cents.

Packages into New York City on Transco Zone 6 gained 50 cents to $2.90 and packages delivered to Tetco M-3 were higher by 46 cents to $2.89.

Deliveries to Marcellus points shot higher as well. On Transco Leidy, Tuesday parcels added a stout 36 cents to $2.46 and gas on Tennessee Zone 4 Marcellus gained 61 cents to $2.62.

Appalachian locations were mixed. Columbia Gas TCO fell by 3 cents to $4.40, but on Dominion South gas was seen at $2.69, up 29 cents.

Gulf Coast Texas points were down by a few pennies. Transco Zone 1 next-day deliveries fell 6 cents to $4.37, and NGPL South Texas slipped 4 cents to $4.42. Gas at the Houston Ship Channel fell 4 cents to $4.50, and gas at Carthage changed hands a couple of pennies lower at $4.40.

Analysts saw the day's decline in the futures arena as a function of build burnout. "It is not only that the market has underestimated seven out of the last eight storage releases but also it would appear that the six consecutive triple-digit weekly injections are weighting down prices," said BNP Paribas’ Teri Viswanath, director of commodity strategy for natural gas (see related story). "Indeed, with more than half of the injection season left, it appears that the industry has a shot of surpassing the prior record of ten triple-digit weekly injections set back in 2001."

"The problem of sustaining any downward momentum for further price declines is that the pace of storage injections inevitably falters in the second half of the season.  During 2001, the industry restocked only 72% of the build in inventories recorded in the first half of the injection season.  However, the pace of injections in 2003 was slightly more balanced, with the second half of the season achieving roughly 90% of the restocking recorded in the first half.  Based on our estimates of injections through the end of the first half of the season, a 90% restocking effort would result in just 3.3 Tcf of working gas in storage by end October."

Risk managers see the market going in either direction from a fundamental standpoint, but they counsel holding on to short hedges. "However, as we near the Fourth of July weekend, temperatures are expected to be elevated. A larger than expected storage injection of 113 Bcf (109 Bcf expected) was slightly bearish for natural gas this week," said DEVO Capital President Mike DeVooght. "We have had large builds for the past seven weeks, helping to close the gap between last year's levels and current levels. Natural gas production remains elevated.

"Fundamentally, you can make a case in either direction, but for hedgers, we still feel natural gas rallies near the $5.00 level should be used as an opportunity to lock in some forward pricing. On a trading basis, we will hold current positions." DeVooght suggested that trading accounts and end-users stand aside, but producers and those with exposure to lower prices should hold short the July-October portion of a summer strip sold earlier at $4.20-4.30 as well as a second summer strip sold at $4.50. The summer strip settled Friday at $4.540, according to DEVO figures.

Market technicians see a looming decline if the market can't post a meaningful advance relatively soon. In a weekly summary for clients, United ICAP Vice President Walter Zimmermann said his target last week was $4.48 and "natgas fell to a $4.516 low and closed weak. A $4.515-4.460 low is still entirely consistent with a bull market correction in a continuing advance, [however] bears need a break below $4.320 to have any case.

"This $4.320 is 0.852 of the entire $4.221 to $4.886 decline. From last week's $4.516 low, bulls need a break above $4.605 for it to look like bottoming action. The bearish case rests on the fact that multiple attempts have failed to give a weekly close above the pivotal $4.760 resistance. This keeps the door open for a break below the $4.221 low. If that low breaks, [we] would expect a retest of the uptrend support line from the $1.902 low. That line cuts at 4.000 by mid-July."

Forecasters see a slightly warmer six- to 10-day period than before. Commodity Weather Group in its Monday morning six- to 10-day outlook shows above-normal temperatures extending along an elongated ridge from New York state to eastern Kansas and Southern California. "The weekend saw last week's 11-15 day burst of warming for the Midwest and East progress forward steadily, but there were some cooler change on average," said President Matt Rogers.

"Highs in the Midwest still peak in the low to mid 90s at the beginning of the next workweek (June 30), which is similar to last Friday's forecast. The East sees temperatures peak around the middle of next week (July 2) in the low to mid 90s, but it was here that the cooler changes were a little more pronounced. Looking further out into the forecast, the 11-15 still shows the heat in the east fading as ridging once again pops up across the Western states. The 11-15 day, overall, looks to be a variable, but warm-dominated period still."

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