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Spot Gas Marches Lower, But Sub-$4 Futures Steady For Now

Physical natural gas for weekend and Monday delivery continued to trudge lower in Friday's trading, partly motivated by a need to play catch-up to Thursday's screen declines, but weather forecasts continued to call for seasonal temperatures across a broad swath of the country.

Only a single lightly traded New England point was in the black. Observers cited a lack of power load and the ability to buy weekend intraday as factors limiting the need to commit to three-day parcels. Marcellus and New England points saw the greatest declines, but the Mid-Atlantic was also soft. The market overall was down 13 cents on the day to $3.68. A week ago the average physical price was $3.90.

At the close of futures trading August was 0.3 cent lower at $3.951 and September had dropped 0.2 cent to $3.955. August crude oil was lower by 6 cents to $103.13/bbl.

Physical prices may be down for the moment, but forecasters see a return to more conventional heat and humidity in the coming days. AccuWeather.com meteorologists on Friday said, "After record-challenging chill this week, temperatures will rebound to their highest level of the year so far in parts of the North Central states next week. It will feel more like summer in much of the northern Plains and the Midwest early next week.

"A forecast shift in the jet stream will set into motion a marked temperature turnaround this weekend into next week over portions of the northern Plains and Midwest. Heat that built up over the Northwest earlier this week will break off and drift into the Midwest early next week.

"Rounds of heat and humidity will continue to surge in ahead of cool fronts from the northern Plains to the Midwest through the end of July. The heat could carry more impact than a typical summer, [and] many areas over the Upper Midwest have only had a couple of days near 90 F so far this summer," said AccuWeather.com meteorologist Paul Pastelok. The highest that temperatures have been thus far this summer has been 88 in Indianapolis, 90 in Minneapolis and 91 in Chicago. "High temperatures will approach 90 F from portions of North Dakota to Minnesota, Wisconsin, Iowa, Illinois, Michigan, Indiana and Ohio during multiple days next week."

Temperature forecasts over the weekend, however, showed highs struggling to get close to seasonal norms. AccuWeather.com forecast that New York City's Friday high of 82 would ease to 80 Saturday before crawling up to 83 on Monday. The seasonal high in New York is 84. Pittsburgh, PA's Friday maximum of 79 was expected to drop to 71 Saturday before jumping to 86 Monday. The normal high in Pittsburgh mid-July is 83. Chicago's Friday high of 73 was seen rising to 79 Saturday and jumping to 87 by Monday. The normal high in the Windy City is 84.

A Houston-based market observer said that given the day's decline in the physical market, he didn't know how much lower the market could go. "The market is likely at value. Algonquin Citygates is pretty weak, and there isn't a lot of power load."

The New England ISO reported that Friday's peak load of 18,460 MW was expected to drop to 16,500 MW Saturday and 15,670 MW Sunday. NYISO (New York Independent System Operator) predicted the peak load Friday of 22,883 MW would slide to 20,121 MW Saturday and 20,317 MW Sunday.

Algonquin Citygate prices fell 11 cents to $2.54 and weekend, and Monday deliveries to Iroquois Waddington shed 42 cents to $3.53. Gas on Tennessee Zone 6 200 L fell a penny to $2.77.

Marcellus points took a double-digit hit. Gas for the weekend and Monday on Transco-Leidy fell 26 cents to $1.99, and deliveries to Tennessee Zone 4 Marcellus also fell 26 cents to $1.87. Gas on Millennium fell 14 cents to $2.33.

Mid-Atlantic locations were also soft. Gas bound for New York City on Transco Zone 6 fell 5 cents to $2.44 and gas on Tetco M-3 shed 10 cents to $2.39.

This has truly been a weather-driven market, and if there is any hope of resurrection of the bullish case, it will need to come in the form of a late-summer heat surge capable of putting a severe dent in the current robust levels of injections. At present, that does not seem to be in the cards.

WSI Corp. said, "[Friday's] six-10 day period forecast is fairly similar to the previous forecast. Due in part to the day shift, the forecast is a bit cooler over the northern U.S, but warmer across the South and West. Forecast confidence is considered average based on reasonably good large-scale model agreement with the overall progression of the pattern. However, models continue to diverge with some of the technical and timing details across the northern U.S.

"The risk may be to the warmer side across the Midwest into the Northeast during the front half of the period. The upside risk is placed over the southern and western U.S. during the back half of the period."

Farther out weather patterns also struggle to offer help for the bulls. "Current model guidance suggests that the week of July 28 still appears to be below-normal for the Northeast and Midwest, with the heat held primarily in the western U.S," said Teri Viswanath, director of commodity strategy for natural gas at BNP Paribas. "There also appears to be a tropical invest area could develop off the Southeast U.S. Atlantic coast by this Sunday, but it should stay out to sea, and if there is any development, it should be minimal.

"[C]ooler-than-normal weather across much of the nation until August will significantly reduce the potential peak cooling demand this season, with the possibility that next week will be the hottest of the season. Thanks to persistent mild summer weather, prices have dipped below $4/MMBtu with the possibility of a further deterioration as cooling demand begins to ebb," she said (see related story).

Analysts see supply concerns evaporating with each weekly storage report and "as a result, storage has pulled to within 25% of five-year average levels after the deficit shrunk by an additional 42 Bcf," said Jim Ritterbusch of Ritterbusch and Associates in closing comments Thursday to clients.

"With this deficit evaporating in large chunks as a result of an unusually cool summer thus far, supply concerns have been alleviated and a record pace of production has been brought back into focus. Furthermore, the market may need to further discount what is apt to be another huge triple-digit increase in next week's data given this week's sharply downsized CDDs. As bearish fundamentals dominate, the chart picture has also been deteriorating as the market easily sliced through our long-expected support at the $4.05 level. From here, next support develops at 3.92, a level unlikely to be tested until next week as the market will likely spend most of tomorrow digesting today's large 4% loss with nearby futures expected to consolidate within about the lower one-third of today's range," Ritterbusch said.

"Longer term, downside possibilities now develop to about $3.75 per nearest weekly futures charts. Finally, we will note a shift to contango in the front switch, a development that is sending off additional bearish vibes. All factors considered, cool weather patterns continue to rule as this year's mild summer has provided a major offset against a cold winter. While we still expect a price rebound on first indication of a sustainable hot spell, we will also note that the short-term temperature factor will be diminishing in importance with the passing of the August contract later this month. We will caution against attempts to pick a bottom to this sharp weather influenced decline until some evidence of chart support or a shift in the weather patterns is seen."

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