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Storm-Driven Cooling Weighs on Physical Markets; Futures Tumble

Physical gas prices for Thursday delivery fell hard Wednesday as the impact of Tropical Storm Arthur reverberated through short-term weather forecasts. Eastern and Northeast points were the hardest hit, as the storm was expected to travel up the East Coast and cause rain and thunderstorms across major population centers.

Some eastern points were down close to $1.00, with selling widespread from New England into the Marcellus. The overall market decline was more than a dime and market points in the producing regions were down about a nickel.

Futures echoed the weakness in the cash market and took nearly a double-digit dump as traders anticipated another Thursday inventory report from the Energy Information Administration (EIA) into triple digits and well ahead of historical norms.

At the close August had fallen 9.8 cents to $4.357 and September was down 8.8 cents to $4.348. August crude oil shed 86 cents to $104.48/bbl.

Weather forecasters cited the adverse impact Arthur was expected to have on Fourth of July festivities, but next-day temperatures dropped as much as 10 degrees at some points. "Tropical storm Arthur will travel up the East coast Thursday into Friday, inducing heavy rain and creating rough surf conditions," said AccuWeather.com meteorologists. "However, the storm is forecast to move out in time for evening fireworks on the Fourth.

"If the tropical system takes a northeastward turn late in the week, as we suspect, rain and thunderstorms will begin to shift eastward and out to sea Friday afternoon and evening so that the weather improves for fireworks Friday night from Washington, DC, to Philadelphia and New York City," said AccuWeather.com's Paul Pastelok.

He said "cloudy skies and thunderstorms will hit the New York area late this week. Temperatures will stay consistent in the upper 80s before dropping to the upper 70s on Friday. Surf and tides will gradually ease over the weekend. At the same time, humidity levels will lower as Arthur races toward the Maritimes."

Traders see Arthur's primary impact, besides possible physical and life-threatening damages, as a loss of demand should the storm cause power outages and moderate temperatures at major population centers. At 2 p.m. EDT Wednesday the National Hurricane Center said Tropical Storm Arthur was 110 miles east northeast of Cape Canaveral, FL and was sporting 60 mph winds. It was moving to the north at 7 mph, but "a turn to the north-northeast is expected tonight followed by a turn toward the northeast  with an increase in forward speed on Thursday. The center of Arthur is expected to pass east of northeastern Florida tonight and move parallel to the coasts of South and North Carolina during the next 24 to 36 hours."

WeatherBELL Analytics' Joe Bastardi said a modest shift in trajectory to the west could cause major disruptions during the holiday weekend.

"Like a snowball rolling down a hill, the ramp up may be even quicker than I have it once this gets farther north...There is room for a shift of 30-50 miles northwestward, which is a small error from 2-3 days out in skill score land. This outlines why this is a 'nightmare' scenario, ...[and] this is not a minimal storm at its closest approach.

"A 100 mph storm moving from Cape Lookout to Cape Hatteras on the biggest holiday of the summer season would be a major event, trapping people, knocking out power; the after effects will be a real problem. On our [projected] track, it's a big pain, with hurricane gusts in that area, but the bigger resort areas to the north have less. Keep in mind, the main road on the Outer Banks floods very easily."

Temperatures along the Eastern Seaboard were expected to plunge. AccuWeather.com predicted that Boston's 94 high on Wednesday would drop to 84 Thursday and ease to 78 on Friday. The normal high in Boston in early July is 81. New York City forecast maximum highs on Wednesday of 91, dropping to 87 Thursday and falling to 79 on Friday. The seasonal high in New York City is 83. Baltimore's 93 Wednesday high was expected to slide to 88 Thursday before dipping to 84 Friday; the normal high this time of year is 87.

Next-day deliveries to the Algonquin Citygates fell 63 cents to $4.01, and gas at Iroquois Waddington shed a dime to $4.53. On Tennessee Zone 6 200 L, Thursday parcels were seen at $4.01, down 55 cents.

Gas into the Mid-Atlantic fell harder and faster. Thursday parcels on Transco Zone 6 New York dropped 98 cents to $3.14, and deliveries to Tetco M-3 shed a stout 74 cents to $3.11.

Prices also weakened at Marcellus points. Deliveries to Tennessee Zone 4 Marcellus came in 3 cents lower at $2.85 and gas on Transco Leidy was off 23 cents to $2.98.

Gas in the Midcontinent eased as well. At the NGPL Midcontinent Pool, Thursday gas was seen 2 cents lower at $4.23, and deliveries on ANR SW shed 5 cents to $4.22. On OGT Thursday parcels were seen at $4.11, down 5 cents, and gas on Panhandle Eastern was quoted 6 cents lower at $4.12.

Traders Thursday may have a double whammy of factors to deal with. Not only will the track of the storm and its potential effect on demand be on traders' minds, but the inventory report is expected to surpass triple digits again. Last week a stout 110 Bcf was injected and for the week ended July 27, expectations are just a shade less.

Last year 76 Bcf was injected and the five-year average is for a 68 Bcf build. Analysts at United ICAP forecast an increase of 104 Bcf and at IAF Advisors in Houston estimated build is 102 Bcf. A Reuters poll of 21 traders and analysts revealed a sample average of 100 Bcf with a range of 91 Bcf to 106 Bcf.

Tim Evans of Citi Futures Perspective sees Arthur as having little impact. The storm is "unlikely to have much of an impact even on the demand side of the market," he said Tuesday. He said "changes to the temperature outlook were mixed compared with Monday, with the week ending July 11 looking somewhat warmer and more supportive, but the week ending July 18 looking cooler than a day ago."

Evans forecast a storage build of 106 Bcf in the EIA inventory report, with "estimates we've seen so far suggest expectations may be anchoring in the 98-100 Bcf zone. Net injections at that level would generate bearish comparisons with both the date-adjusted 75 Bcf build from a year ago and the 68 Bcf average. Our model generated a larger 106 Bcf refill, which we view as representing at least some risk of a bearish surprise."

Evans said "the big picture has been stable, with the year-on-five-year average storage deficit declining as it has for the past ten weeks, confirming that the market is becoming better supplied on a seasonally adjusted basis. As the deficit declines, we see the upside potential for prices shrinking in tandem, and the downside risk expanding. We continue to see a chance that nearby futures could test the $4.00-4.25 range in the weeks ahead."

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