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East, Northeast Down in Mixed Market; Futures Traders Targeting $3.18

Spot gas for Thursday delivery worked lower in Wednesday's trading, with stout double-digit losses up and down the East Coast. New England and the Mid-Atlantic were especially hard hit, but Marcellus points also fell.

From the Midcontinent west, many points were able to post gains of a few pennies, but California locations were mixed. The overall market was down 2 cents.

Futures trading was lackluster ahead of the Energy Information Administration (EIA) weekly storage report due Thursday, and at the close, August was down 1.0 cent to $3.762 and September had slumped 0.9 cent to $3.776. September crude oil gained 73 cents to $103.12/bbl.

Thursday’s high temperatures were forecast to drop nearly 20 degrees in New England. Wunderground.com predicted a high in Boston of 91 Wednesday would fall to 73 Thursday before climbing to 83 on Friday. The seasonal high is 82. New York City's 88 on Wednesday was expected to fall to 83 Thursday and move to 84 on Friday, the normal temperature this time of year. Philadelphia's 94 on Wednesday was to drop to 82 Thursday and then to 86 Friday. The normal high is 83.

The National Weather Service in southeast Massachusetts forecast a cool front in New England by Wednesday evening, "triggering scattered showers and thunderstorms. A few strong thunderstorms are possible west of the central hills. Showers will likely linger into Thursday southeast of the Boston to Providence corridor. High pressure builds with drier weather for Friday and Saturday. An approaching warm front Sunday will bring more humid unsettled weather for the early part of next week."

Gas for Thursday delivery at the Algonquin Citygates tumbled 48 cents to $2.90, and gas on Tennessee Zone 6 200 L fell 57 cents to $2.95. Deliveries to Iroquois Waddington shed 7 cents to $3.91.

Gas bound for New York City on Transco Zone 6 fell 46 cents to $2.71, and parcels at Tetco M-3 shed 38 cents to $2.65. Gas on Millenium was seen 19 cents lower at $2.55 and parcels on Dominion South fell 29 cents to $2.45.

Marcellus points were also softer. Gas for Thursday on Transco Leidy changed hands 6 cents lower at $2.40, and deliveries to Tennessee Zone 4 Marcellus lost 9 cents to $2.25.

Traditional pipeline flow patterns continue to get bent, twisted, and rerouted. Industry consultant Genscape Inc. reported that Tennessee Gas Pipeline (TGP) “has been backhauling at capacity past compressor station 200 [Kentucky Ohio border] to the south into Kentucky. This increase in backhauling volume is made possible by the first phase of the Utica backhaul transportation project that was completed this April; by Marcellus production growth; and by the decrease in demand for gas in the Northeast as heating demand subsided.

“The first phase of the Utica backhaul transportation project allowed for roughly 100 MMcf/day of additional backhaul capacity on the pipeline. The second phase...will add another 400 MMcf/day of backhaul capacity."

Genscape noted that Kinder Morgan “has not made a public announcement regarding the completion date of the second phase. TGP was flowing northbound at station 200 as late as June 2013. With the growth in Marcellus production, TGP started bringing gas down south. Southbound flow averaged 330 MMcf/d for August, September and October last year.

“This past winter, TGP on average, brought 610 MMcf/d of gas down south past Station 200. The southbound flow has increased steadily since March, averaging 860 MMcf/d in April, 1,130 MMcf/d in May, and 1,227 MMcf/d in June. Maintenance has interrupted the flow on some days in July, [but] July-to-date average for flow through Station 200 is 1,196 MMcf/d."

To the West, market points were able to make modest gains. Gas on Northwest Pipeline Wyoming fell 2 cents to $3.72, but at Opal Thursday gas was quoted at $3.80, up 2 cents. On CIG, next-day deliveries came in at $3.75, up a penny, and at the Cheyenne Hub Thursday gas was seen flat at $3.80. On El Paso non-Bondad gas was quoted at $3.84, up 4 cents.

A New York floor trader believes the next object to the downside is $3.18. "That's the old low. I predicted $3.75 more than a month ago, and if we break $3.75, $3.18 is the next target. There seems to be a lot of gas out there."

Traders Thursday will have a chance to send August futures on their way to $3.18 as expectations are for a hefty reduction in both the five-year and last year storage deficit. Last year, 43 Bcf was injected and the five-year pace stands at 46 Bcf.

Injections for the week ended July 18 are anticipated to be at if not above 100 Bcf. United ICAP forecasts an increase of 90 Bcf, and IAF Advisors in Houston calculates a build of 93 Bcf. A Reuters poll of 23 traders and analysts showed an average 96 Bcf with a range of 89 Bcf to 106 Bcf.

Tim Evans of Citi Futures Perspective said the small contango between the August and September contracts of just 1.3 cents "is a reminder that for all the above-average storage injections and decline in price over the past few weeks, the market also remains tighter physically than in recent years."

Evans estimated a build of 104 Bcf in EIA’s gas storage report and suggested that there may be something of a "bearish surprise" inasmuch as most estimates seem to be coming in in the 96-100 Bcf range.

"Below-normal readings remain favored to linger over the South-Central U.S., with this region into the Southeast shifting cooler in [Wednesday's] outlook,” according to MDA Weather Services Wednesday 11- to 15-day forecast. “This further southward dig of cool air comes as ridging remains strong across the higher latitudes, with the northern tier of the nation shifting a touch warmer today.

“Model agreement remains fairly strong with the broad ideas, and as a result confidence holds steady from yesterday. Confidence is lowest in the East where there is a bit more uncertainty with regard to how fast cool air breaks down."

Tom Saal in his work with Market Profile said determination of weekly "break out/down targets present potential trading targets to assist in your hedge trading decisions. The ‘Monday/Tuesday’ rule is simply the expected pricing target(s) when the range of the ‘day’ trading sessions combined from Monday and Tuesday are exceeded." Saal cited one of the main advantages of using the methodology is that it is objective. "No subjective emotions/opinions/excuses to get in the way of making a decision."

Saal expects the market to test Tuesday's value area at $3.834-3.798 and from there he advises clients to go with the weekly breakout targets from an initial balance of $3.892-3.768. He cited breakout targets at $3.954 and $4.016, and breakdown objectives at $3.706 and $3.644. From there he is looking for a test of a second value area at $3.965 to $3.942.

"The back years, Cal'15, Cal'17 and Cal'19, remain extremely oversold. Buyers be ready...think objectivity," he said.

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