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Strong Cash Able To Outpace Screen; October Gains 7 Cents

Gas for next-day delivery took its cue from a pipeline outage, a strong screen and an underlying firm power market in Monday's trading. Only a handful of points failed to score gains and most points advanced upwards of a dime.

New England and Mid-Atlantic points showed the greatest gains, but California, the Marcellus and Appalachia were also deep into a double-digit rise. Overall the market gained 22 cents. October futures were higher by 7.4 cents at $3.931 and November was up 8.7 cents to $3.997. October crude oil gained 65 cents to $92.92/bbl.

A pipeline accident at a gathering line which delivers gas to the Henry Hub prompted Chevron to shut in the line after a valve failure occurred on Saturday. The accident left one worker dead and two others injured, but the shut-in impacted only a minor amount of production and the line was being depressured (see related story).

Otherwise a firm power market kept buyers interested as loads were forecast to increase and next-day peak power held steady. ISO New England forecast that Monday's peak load of 15,570 MW would rise to 15,960 MW Tuesday before easing to 15,860 MW Wednesday. The New York ISO expected Monday's peak power load of 18,835 MW would increase to 19.241 MW Tuesday and ease to 18,632 MW Wednesday.

IntercontinentalExchange reported that Tuesday on-peak power at the ISO New England Massachusetts Hub rose 13 cents to $31.74/MWh and deliveries to the PJM West terminal gained $1.42 to $36.59/MWh.

Gas bound for New York City on Transco Zone 6 surged 51 cents to $2.56 and deliveries to Tetco M-3 added 43 cents to $2.52.

In the Midwest and Great Lakes next-day gas jumped by double digits although the weather outlook offered little encouragement. Forecaster Wunderground.com predicted the high in Milwaukee Monday of just 56 would rise to 66 Tuesday and reach 69 Wednesday. The seasonal high in Milwaukee is 72. Chicago's Monday high of 63 was seen advancing to 65 Tuesday and 67 on Wednesday. The normal mid-September high in the Windy City is 76. Indianapolis' Monday high of 70 was expected to slide to 68 Tuesday before recovering to 70 Wednesday. The normal high in Indianapolis this time of year is 78.

The National Weather Service in Indianapolis said "A weak low pressure system moving through the area today and tonight will continue to bring some showers and perhaps a few thunderstorms to the region before precipitation is again shut off by high pressure which will dominate the region through the remainder of the week. The next frontal system will not impact the area until the latter portion of the weekend. Temperatures should gradually warm but remain below normal through much of the week."

Next-day deliveries on Alliance rose by 12 cents to $3.98 and gas at the Chicago Citygates gained 12 cents to $3.98 as well. Parcels on Consumers added 14 cents to $4.02 and gas on Michcon rose 15 cents to $4.05.

Gulf locations were strong as well. Gas on Transco Zone 3 was up by 12 cents to $3.90 and packages at the Henry Hub gained 10 cents to $3.91. Gas on Tennessee 500 L rose by 13 cents to $3.89 and deliveries to Katy added 9 cents to $3.92.

High weather-driven demand is likely to keep West Coast prices firm. Industry consultant Genscape "forecasts the heat wave blanketing Southern California will drive demand there above 3 Bcf/d for just the 4th time this summer-to-date. Accuweather is forecasting daily average temperatures in the Los Angeles basin will run nearly 7 degrees above normal, reaching 80.8° on Monday, 82.3° on Tuesday, and 82.7° on Wednesday. At those temperatures, Genscape expects demand will average just over 3.0 Bcf/d through Wednesday."

The firm acknowledged some displacement by wind generation. Genscape Power’s WECC region group has noted that wind generation within the CAISO will be strong and consistent this week. "Stronger renewables generation this summer has teamed with growing energy efficiency measures to more than offset the effects of lower hydro output and another summer without generation from the San Onofre nuclear plant," the firm said.

Gas for Tuesday delivery at Malin shot up 51 cents to $4.35 and at the PG&E Citygates next-day parcels were quoted 15 cents higher at $4.51. At the SoCal Citygates Tuesday gas changed hands at $4.48, up 10 cents at the SoCal Border gas rose 22 cents to $4.25.

For the most part, shoulder season weather is out of the picture in terms of being a market driver, and most likely attention will turn to hefty production and storage. "Warmer changes in Texas in the coming days (especially Dallas) combined with warmer shifts this weekend on the East Coast along with slightly cooler midweek conditions in the Midwest contribute to demand gains compared to Friday's outlook when looking at both heating and cooling degree days together," said Matt Rogers, president of Commodity Weather Group in a Monday morning report.

"This time of year finds very low demand nationally, so the gain in actual levels may be smaller than the literal number change of degree days (given the lack of effectiveness due to shorter duration at peak periods). Otherwise, the American guidance still offers cooler risks to our outlook for the Midwest and East in the 11-15 day while the European and Canadian are mixed to normal. The West is the area with highest confidence on warmest anomalies. Meanwhile, outside of Hurricane Edouard turning back out to sea, the Atlantic tropics are very quiet currently with no threats seen developing this week."

Risk managers see an environment tilted to the downside. "As we wrap up the summer, there is a very good chance that the gas market will continue to probe the year's lows. If we fail to hold the $3.75-3.80 level, technical selling could push the gas market into the mid $3 level," said Mike DeVooght, president of DEVO Capital.

"A cool summer, high production and mediocre demand continue to keep the gas market on the defensive. To have a substantial bull market, we feel we need to see an uptick in demand to offset the steady production increase we are experiencing in the U.S. We could see short-term weather-related spikes, but we still feel selling rallies above $4.50 for producers is an attractive forward selling level."

DeVooght currently recommends that trading accounts and end-users stand aside, and for those market longs holding on to what's left of a short summer strip, he advises staying short the initial position at $4.20 to $4.30 and also holding short a second summer strip at $4.50.

Tom Saal, vice president at INTL FC Stone, in his work with Market Profile expects the market to test last week's value area at $3.954 to 3.786 before moving on and "maybe" testing $4.568 to 4.482.

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