The physical market slipped about a penny Thursday with quotes mostly about one or two cents on either side of unchanged. California points suffered a serious drubbing as a trio of factors combined to send points in the southern portion of the state reeling. Industrial users buying at index saw a market that did not look like it would turn around for several years and admitted any losses on the purchase of physical gas were made up by gains in the financial markets.

At the close of active futures trading May had fallen 13.3 cents to $2.149 and June had retreated 13.1 cents to $2.270. May crude oil swan-dived $2.63 to $102.78/bbl.

An abrupt turnaround in the weather helped pull the rug out from under California prices. “We are going from cloudy windy, rainy and cold to the 70s tomorrow [Friday],” said a PG&E Citygate trader. “We went from some pretty high loads over the last seven to eight days, our core customers were using a lot of gas, to a complete turnaround. There was a big drop in residential demand behind PG&E Citygate,” he said.

“We also had to trade for a Friday-Saturday strip, and the market priced in a potential OFO [operational flow order] anytime you group a couple of days together. In addition it was the end of month and you can’t create any imbalances. It was the perfect storm, end of month, transitioning from withdrawal to injection, and changing from cold weather to hot weather,” the trader said.

Southern California points saw double-digit declines. Both SoCal Citygate and SoCal Border were quoted about 16 cents lower, and El Paso South Mainline was seen close to 17 cents off Wednesday’s close. PG&E Citygate fell by just a nickel.

Longer-term industrial buyers had locked in their gas for April at index. “We will buy basis out into the future and settle against that,” a Midwest buyer said.

“I am tremendously bearish in the short term, calendar year 2012 and into 2013 based on where storage levels are, lack of demand in the foreseeable future and the production levels that are being sustained. I am not a buyer of gas in the near term, but by 2015 and 2016 we may be coming into some attractive levels. You can imagine U.S. demand turning around by then and production right-sizes itself in that time frame as well.”

Gas into the Chicago Citygates added two cents, and deliveries on Consumers and Michcon both fell by a penny.

In the Midcontinent prices were flat for the most part. Panhandle Eastern and ANR SW were flat, while OGT and NGPL Midcontinent Pool both gained a cent.

Futures bulls were hoping the Energy Information Administration’s storage report would show signs that announced production cutbacks and a lower gas-directed rig count would impact storage injections and indicate lower production. Lower production is key to a more balanced market, analysts say.

The Energy Information Administration reported an increase of 57 Bcf, well ahead of historical levels and greater than what some of the best minds in the business had forecast. Last year at this time 7 Bcf was injected, and the five-year average stands at an 8 Bcf withdrawal, but by all accounts, Thursday’s report continued to build on the mammoth storage surplus. For the week ended March 23 Kyle Cooper of IAF Advisors in Houston calculated a 48 Bcf build, and Citi Futures Perspective analyst Tim Evans expected a 49 Bcf increase. Industry consultant Bentek Energy had anticipated a 47 Bcf injection.

John Sodergreen, editor of Energy Metro Desk, was looking for the report to contain some unexpected developments. “[W]e think the operators and their ilk are still playing with figures and flows in such a way that we foresee surprises across the next several weeks. Jumping from draw season to injection season a few weeks early tends to confound the operations side of things, we’re told. That huge overhang is also causing problems. And until the overhang is sliced down a bit (quite a bit), we expect this particular shoulder season to be a bit more eventful — read volatile — than we have seen in years,” he said. For this week’s report, the editor came in at 56 Bcf, or roughly 8 Bcf higher than the consensus. “A report 5 Bcf away from the consensus should not surprise, our tealeaves tell us,” Sodergreen said.

Market technicians studying the day’s price action suggest that current price levels have a chance to hold. “We did not go through any technical support levels,” said Steve Blair, analyst with Rafferty Technical Research in New York.

“We are very close to major support at $2.10 which we have been suggesting. The next support under that is $1.96. In the last couple of weeks we haven’t really taken out any major support. This [$2.10] is a major support level. It should hold, but these guys are out there pulling more gas out of the ground than we know what to do with, and weather hasn’t been conducive to using a lot of natural gas either.”

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