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Weak Futures Outdone By Weaker Physical Market

Physical gas for delivery Thursday was mostly lower in Wednesday's trading, with steady to nominal gains in the Rockies, West Texas, and Midcontinent. However, those points were overwhelmed by double-digit losses in the Northeast, Mid-Atlantic and Appalachia.

On average, the physical market weakened by 11 cents. Futures continued to grind lower with traders looking at $4.00 as the next bastion of support.

At the close, August was 3.4 cents lower at $4.170, and September was down 2.8 cents to $4.166. August crude oil skidded $1.11 to $102.29/bbl.

Traders working the New England markets had to adjust their positions to accommodate a near-term weather outlook that called for nothing more than normal temperatures. The National Weather Service in southeast Massachusetts said "very warm weather" was to continue and "mainly dry weather will prevail for most of the region. Much lower humidity and seasonable weather return Thursday into Saturday as high pressure builds in behind a departing cold front. The high pressure system will move off the coast early next week allowing humidity to return along with the risk of a few showers/ thunderstorms."

Forecaster Wunderground.com predicted that the high Wednesday in Boston of 88 would recede to 82 Thursday and slip to 78 on Friday; he seasonal high is 81. The high of 88 in Harrisburg, PA Wednesday was seen dropping to 85 Thursday but recovering slightly to 86 Friday. The seasonal high is 86. In Norfolk, VA, the high Wednesday of 94 was forecast to drop to 85 Thursday and to 82 Friday; the normal high is 88.

Gas for Thursday delivery on Millenium fell 43 cents to $2.54, and Iroquois Waddington was off a dime to $4.17. Deliveries to the Algonquin Citygates tumbled 46 cents to $2.96, and gas on Tennessee Zone 6 200 L dropped 27 cents to $3.14.

Quotes in the Mid-Atlantic didn't fare much better. Gas headed for New York City on Transco Zone 6 shed 19 cents to $2.95, and deliveries to Tetco M-3 were lower by 38 cents to $2.65.

Gas on Columbia TCO was off a penny to $4.17, but packages on Dominion South skidded 41 cents to $2.36.

Industry consultant Genscape Inc. reported a loss of market share to coal on northern portions of the ANR system (see related story).

"Power burn on ANR's northern system has been lower this summer to date on a weather-adjusted basis," said Genscape analysts. Gas demand "for power generation this summer has been lower at every temperature range than in 2013 and 2012.

"Remarkably low gas prices throughout the EIA East region in 2012 gave gas a cost competitive edge over coal for gas generation. Since then, however, gas prices have risen while coal has stayed relatively flat, making gas more expensive than coal per MMBtu. This has allowed coal to regain a larger share of the power stack at the expense of gas.

"This summer, that trend appears to be continuing. Moreover, natural gas is losing additional market share this summer as nuclear facilities near the end of outage season and more nuclear power generation comes back online. This trend is likely to persist through the remainder of this summer as gas prices remain well supported by the need to refill storage inventories that were drawn to record-lows following this past winter."

Thursday's Energy Information Administration storage report is expected to show another hefty build, well above historical norms. Estimates generally center around a 90 Bcf injection, but the recent declines in the futures market appear to be at odds with basis valuations. As an example, basis for the entire November March period on Algonquin Citygates using figures from CME averages $9.64, a hefty premium for the winter period.

"That is index-flat," said a veteran industry trader. "Typically in the winter, nothing trades at index-flat. That's just the financial part of it. When you want to know what physical [basis] is you have to add 25 cents and in the dead of winter you can have premiums of a dollar."

In spite of remarks by industry talking heads that gas storage is less an issue than it was only a few weeks ago, and indications that higher production out of areas like the Marcellus will make storage less necessary, the basis markets tell a different story.

Last year 80 Bcf was injected and the five-year average comes in at 72 Bcf. IAF Advisors calculates a build of 90 Bcf as does Stephen Smith Energy Associates. A Reuters poll of 22 traders and analysts revealed an average 92 Bcf with a range of 88 Bcf to 101 Bcf.

The expected "injection of 90 Bcf" is "closer to norms than we have seen recently on an absolute basis, but on hotter than normal weather, so implied oversupply continues," wrote analysts at Tudor, Pickering Holt & Associates Inc. "Cooling degree days [CDD] for the week were 77; plus-7 CDDs versus the week's historic norms and plus-14 versus the previous week."

Analysts offered the caveat that with the Fourth of July "falling the day after reporting period, this week's calculations are more challenging than normal, but sequential math suggests 80 Bcf on a week/week uptick in air conditioned-driven electric demand...A higher 90 Bcf print would suggest another 1 Bcfd of incremental oversupply."

Other analysts suggested that the market may be trying to recover from three days of selling, but that is not indicative of any fundamental market change.

"The natural gas market extended its slide on Tuesday, with the August contract flushing down to a $4.129 low before recovering to a $4.204/MMBtu settlement, down 2.1 cents (0.5%) on the day," said Tim Evans of Citi Futures Perspective on Tuesday.

The August contract managed to put in a higher low Wednesday at $4.167 than Tuesday's $4.129 and the "rebound from the lows suggests the market may have exhausted or that enough bargain hunting emerged to put a floor back under the market for at least now.

"While the market may well be probing price levels that represent value, the fundamentals have been weakened further, with weather forecasts turning cooler, particularly for the central U.S. This will reduce air conditioning loads and power sector demand for natural gas in turn, allowing somewhat more natural gas production to report to storage."

Joe Bastardi of WeatherBELL Analytics in a Wednesday morning 20-day forecast expects to see a "major cool outbreak...centered over the nation's heartland." He added that "moderation occurs after, but a trough holds over the Ohio Valley.

"High confidence in cool forecast [and] CFSv2 [NOAA Climate Forecast System version 2] says kiss the rest of summer (through August) goodbye as far as large-scale sustained heat. Texas is back and forth, but a strong cool shot makes it there next week too, along with East Coast."

WeatherBELL calculated for the next 15 days a national accumulation of 150 CDD, well short of last year's 194.6 CDD and also below the 30-year average of 172.3.

Evans is forecasting a storage build for the week ended July 4 of 88 Bcf and sees the trend of diminishing storage deficits continuing. By July 25, the year-on-five-year deficit contracts from its current 790 Bcf of 673 Bcf.

The recent Short Term Energy Outlook gives some clues to the recent price slide. "U.S. dry gas production was 3.01 Bcf/d (4.5%) higher than a year ago, while demand was little changed, with industrial production up 0.63 Bcf/d (3.3%), but power sector consumption 0.66 Bcf/d (2.7%) year/year. It looks as though it's going to take more extreme weather than what we've seen so far this summer in order to produce a below-average storage refill," said Evans.

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