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Dominion South Posts 16-Yr. Low; October NatGas Expires Firm

Physical gas for weekend and Monday delivery was mixed in Friday's trading as double-digit drops at eastern points along with declines in California were able to dominate widespread market strength in the Gulf Coast, Great Lakes and Rockies.

The October futures contract expired on a firm note but was unable to make it over $4. It left that hurdle for the now-spot November contract. At the close October was higher by 1.3 cents to $3.984 and November added 1.5 cents to $4.029. November crude oil gained $1.01 to $93.54/bbl.

Weather forecasters called for warm, pleasant weather to envelop the Eastern Seaboard, thus diminishing the need to make three-day deals. "In the wake of the modest midweek nor'easter, sunshine is in store for the Philadelphia area this weekend into Monday," said AccuWeather.com meteorologists. "High pressure extending from Maine to northeastern Texas will build eastward. Along with the fair weather system will come building warmth. In the Philadelphia area, highs in the lower 80s are in the offing for Saturday and Sunday with abundant sunshine."

Wunderground.com predicted that the Friday high in New York City of 77 degrees would reach 82 by Saturday but recede to a more seasonal 76 by Monday. The normal high in New York City is 71. Philadelphia's Friday high of 79 was expected to reach 82 Saturday and ease to 77 Monday. The seasonal high in Philadelphia is 71. Washington DC's 75 high Friday was forecast to reach 83 Saturday before dropping to 74 Monday. The normal high in the Nation's Capitol this time of year is 76.

Spot gas prices at several eastern points continued to grope for new lows. The heavily traded Dominion South point fell to $1.58 in Friday for weekend and Monday delivery, the lowest point since it languished at $1.17 in December 1998.

In September 2012 Dominion completed the 110-mile Appalachian Gateway Project, and the end result was a big increase in the amount of Marcellus Shale gas flowing from West Virginia and southwestern Pennsylvania to markets along the eastern seaboard. Thus as a pricing point, the Dominion line is in the thick of Marcellus oversupply.

Analysts said the plunge in not only Dominion South but other eastern points "doesn't come as much of a surprise. Ever since [Tennessee] Zone 4 Marcellus started showing up as a price hub, we've been seeing a lot of downward pressure on those Appalachian production prices because there are so many wells that have been drilled but not completed because there is not enough capacity to take the gas to market," said Genscape Senior Analyst Rick Margolin.

"As of now there is simply not enough demand in either the Northeast or Southeast where people want to start backhauling to. We are not going to see a whole lot of support for those prices until we see some structural shifts in demand such as LNG, and additional coal to gas switching. Basically, what you are seeing in the Northeast now is analogous to what was happening in the Rockies pre-REX," he said.

Other eastern points were also weak. Deliveries on Millennium shed 11 cents to $1.63, and gas on Leidy Transco was off 17 cents to $1.61.

Weekend and Monday gas on its way to New York City on Transco Zone 6 fell 15 cents to $1.73, and deliveries to Tetco M-3 changed hands 21 cents lower at $1.61.

New England locations took some big hits, with deliveries to the Algonquin Citygates dropping 34 cents to $3.04 and parcels at Iroquois Waddington falling 53 cents to $3.25. On Tennessee Zone 6 200 L packages were seen at $3.22, down 81 cents.

Gulf points were firm. The Henry Hub for weekend and Monday deliveries rose 2 cents to $3.90, and gas on Tennessee 500 L was higher by 5 cents to $3.86. At the Houston Ship Channel, gas was quoted at $3.93, up 3 cents, and at Katy gas changed hands at $3.91, up 6 cents.

Futures trading was uninspired, and the modest gains did not sway traders from their thinking that the market was headed down to test the low end of its longstanding $3.80-4.00 trading range. "The November settle over $4 could give it a little push, but longer term, look to the downside," said a New York floor trader. "I don't think the market can sustain a rally. It may go for a couple of days, but you know what they say. 'It's harder to climb a mountain than it is to fall down.'"

On the other hand, the ability of the market to integrate a hefty storage build into pricing essentially without missing a beat may be sending latent bullish signals. Traders wonder whether even though the market fell initially when the storage figures were released Thursday morning, it still was able to absorb a near-100 Bcf build rather easily.

"Most guys were looking in the 98 Bcf range, so it came in pretty much as expected," said a New York floor trader. "To get this market moving one way or another there is going to have to be a big weather-related event. If you look at these numbers, these are big for this time of year, but the market did not react, so that has to tell you something."

Others saw the market's non-reaction to the bearish number as setting up Friday's expiration. "The ability of this market to absorb a seemingly bearish storage report would appear to set the stage for an active trade tomorrow with the October contract going off the board. While some of [Thursday's] strength may have related to option expires, we feel that this is simply a market which much of the bearish news has been priced in and fresh selling tends to dry up at levels below $3.85 in nearby futures," said Jim Ritterbusch of Ritterbusch and Associates in closing comments Thursday to clients.

"While our downside target to the $3.75 level remains intact in the November contract, we feel that today's lows will need to be violated early next week if any downside momentum is to be maintained. The fundamentals still look bearish with the temperature views still mild into the second week of October and with the dynamic of significant deficit contraction still intact. But we are also conceding to a choppy/sideways trading affair that could extend well into next month.

"With values currently trading near the middle of our expected trading range, we will caution against fresh entry into either side of the market. [Thursday's] 97 Bcf storage injection exceeded average street ideas by 5 Bcf and shrunk the deficit against five-year averages to 12.5% in maintaining our expectations for about a 1% contraction in the deficit per the week through the remainder of the injection cycle."

Power buyers looking ahead to the weekend across the vast PJM footprint will likely have moderating loads and increased renewables generation. WSI Corp. in its Friday morning outlook said, "high pressure will promote fair and warm conditions across the power pool today through the weekend. High pressure is expected to weaken early next week. This may allow a storm system over the southern U.S. to move northward, while a cold front may sag southward. This will lead to increasing cloud cover, and increasing chance of light rain and a downward trend with temperatures.

"High pressure will generally support light and variable wind generation during the forecast period, though a couple of spikes in generation are possible during the next couple of nights. Output may top out in excess of 1 GW. Plentiful sunshine will support solar generation prospects through the weekend," WSI predicted.

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