Strong gains swept through the physical market in Monday's trading as a precipitous drop in next-day temperatures and a strong screen served notice to the bears that maybe their time is up.
A plunge in next-day temperatures across the Great Lakes, while not enough to cause heating load, reminded traders that higher winter demand was just around the corner. Healthy double-digit gains at Midwest points were outdone by half-dollar jumps at eastern locations and only a single lightly traded Rocky Mountain point fell into the loss column. The overall market gain was 17 cents.
Futures bulls brought out the heavy artillery as Friday's settlement of the November contract held $4.00 support, and at the close, November was higher by 12.5 cents to $4.154 and December had posted a gain of 11.3 cents to $4.227. November crude oil added $1.03 to $94.57/bbl.
Next-day prices in the Midwest gained as a 20-degree drop in temperatures was forecast. Forecaster Wunderground.com said Monday's high in Chicago of 79 would plummet to 58 Tuesday but increase to 71 on Wednesday. The seasonal high in the Windy City is 70. Detroit's 78 high Monday was expected to fall to 59 Tuesday and bounce back to 68 on Wednesday; the normal high in late September is 66. Cleveland's 70-degree high Monday was seen sliding to 62 Tuesday before moving back to 67 Wednesday. The typical high in Cleveland this time of year is 66.
AccuWeather.com's Henry Margusity suggested that temperature drops in the Midwest may pale in comparison to turbulent conditions. The short-term outlook is calling for active weather this week, with rain in the Southeast and severe weather in the Plains, including tornado activity in Nebraska, Kansas and in Colorado. This severe weather has the potential for damaging winds, large hail and possible tornado outbreaks through the end of the week.
In addition, there is potential for a second system to develop in the Mississippi Valley on Wednesday, causing severe storms on Thursday and possibly into Friday.
Also on Friday, expect severe storms to move into Michigan, Ontario and the Appalachians. It's going to be a big week for severe weather, Margusity said.
Next-day gas on Alliance rose 13 cents to $4.07, and gas at the Chicago Citygates added 16 cents to $4.08. Deliveries to Michcon added 10 cents to $4.09, and packages on Consumers were seen a dime higher at $4.09. At Demarcation next-day packages added 18 cents to $4.02.
At eastern points, temperature drops were not expected to be as severe, but steady power loads and strong next-day peak power prices formed a firm foundation for next-day gas purchases.
Wunderground.com predicted that New York City's high of 79 Monday would ease to 76 Tuesday and slide to 72 on Thursday. The normal high is 70. Philadelphia's 79 high Monday was seen rising to 80 Tuesday before dropping to 76 Wednesday. The seasonal high in Philadelphia is 69.
Power loads across the East and PJM were seen steady. The PJM Interconnection forecast that Monday's peak power load of 34,729 MW would rise to 34,831 MW Tuesday and ease to 33,609 MW Wednesday. The New York Independent System Operator predicted that Monday's peak load of 20,828 MW would ease to 20,017 MW Tuesday and 19,605 MW Wednesday.
IntercontinentalExchange reported that peak power Tuesday at the ISO New England's Massachusetts Hub rose $5.52 to $43.09/MWh, and next-day power at the PJM West terminal gained 26 cents to $42.78/MWh.
New England next-day gas rose as Algonquin Gas Transmission reported continuing restrictions between the Cromwell and Burrillville compressor stations. All interruptible and 92% of secondary out-of-path nominations had been restricted between the two points.
At the Algonquin Citygates, next-day deliveries rose 79 cents to $3.83, and gas into Iroquois Waddington jumped 76 cents to $4.01. On Tennessee Zone 6 200 L, Tuesday deliveries traded at $3.89, up 67 cents.
Gas headed for New York City on Transco Zone 6 gained 33 cents to $2.06, and deliveries to Tetco M-3 rose by 39 cents to $2.00. Last week's losses at Marcellus points were partially recovered. Gas on Dominion South rose 31 cents to $1.89, and on Tennessee Zone 4 Marcellus Tuesday parcels were seen at $1.84, up 23 cents. Gas on Transco Leidy gained 28 cents to $1.89.
Futures traders had mixed emotions about the day's advance.
"I like it short term but I do not like it long term," said a New York floor trader. "There's too much [gas] out there, and the builds are there, but we could get a little rally Tuesday and into the week. Look for it to drift off after that. I would put resistance at $4.18 to $4.20.”
Others saw shorts getting caught. "I think [Monday’s] buying was guys who got caught short up against $4.00 and had to cover as prices broke into a new range above $4.00," said a California physical buyer. "You could make the case that fundamentally that prices need to come off, and I think that's where everyone was leaning. Now that prices are breaking out, people are getting stopped out."
He added that the "slightly bullish component is that the [Sept.] 29th is the crossover day between heating degree days and cooling degree days. You are starting to get a little bump up on the heating loads."
Even with a hefty increase in production, analysts looking longer term aren't willing to rule out winter price spikes.
"The problem is that the Producing region has been used to an increasing degree to meet winter demand in the Midwest and Northeast markets," said BNP Paribas analyst Teri Viswanath, director of commodity strategy for natural gas trading. "With stocks in the Producing region much below the five-year average and regional production in decline, there will simply be less supply available during the upcoming winter.
“Therefore, despite the incremental production gains in the Northeast, the prospect of another cold winter and the inflexibility of supply suggest to us that seasonal prices spikes are not off the table this winter."
Near-term weather forecasts are highly variable, but in the landscape of weather/natural gas trading there doesn't seem to be much in the way of market moving events. Perhaps time to sell what little volatility there is.
Commodity Weather Group in its Monday morning outlook said, "Changes from Friday were quite mixed with warmer changes dominating parts of the South (especially Texas side) and California (100s by this weekend in Burbank), while a stronger cool push dives into the Midwest and East later this week and weekend (days 5-7).
"A warmer rebound next week varies by model and that is when the challenges really start. By the 11-15 day, the European ensemble has been showing a warmer pattern returning for the East and South especially with cooler risks shifting back north and west. The American and Canadian ensembles instead filter cooler air back to the East again after a much briefer, weaker warming interlude,” said President Matt Rogers.
"The results are bigger differences and low confidence for the 11-15 day. We took a blended approach with warmer Northeast, California, and Texas, but still a seasonal Midwest. Gains in HDDs [heating degree days] later this week and then CDDs [cooling degree days] for Texas/California leads to a net demand increase today."
Blended approach or not, forecasts of heating and cooling requirements for the upcoming week are far below normal for major population centers. The National Weather Service forecasts that for the week ended Oct. 4 combined HDD and CDD for New England will tally 39, or a whopping 32 below normal. The Mid-Atlantic is expected to see a total of 21 HDDs and CDDs, or 38 below normal and the greater Midwest from Ohio to Wisconsin should only have to endure 34 total degree days, or 29 less than its normal tally.
Risk managers favor the long side of the market. "As we approach the heat season, there will be a reluctance to pressure the market on the short side," said Mike DeVooght, president of DEVO Capital Management, a Colorado-based trading and risk management firm.
"With the end of the [injection] season, we will be monitoring the winter contracts for an opportunity to initiate hedges for the winter months. We will be looking for a rally to the $4.50-5.00 level to do so. For speculators and long hedgers we would purchase the winter $4.20 calls and sell the $3.80, $3.90 puts," he said in a weekend note to clients.