After the surprising 75-90 cent gains on Monday in response to colder weather in eastern market areas, the natural gas cash market took a big step downward Tuesday as high temperatures hit the mid-60s across most of the nation. Many points tumbled more than $1, sharply increasing the basis gap with December futures, which only slipped 12.9 cents Tuesday to $7.471/MMBtu on Nymex.

Henry Hub cash dropped more than 80 cents to the high $5.70s, leaving basis at more than a negative $1.65 compared to the December futures contract. Hub basis was minus 96 cents on Monday.

Basis (near-month futures) at many locations collapsed to minus $2/MMBtu. In the Northeast, about $1 was cut from basis. Market areas also lost ground (about 20 cents in the Northeast) compared to current Henry Hub cash, indicating a substantial drop in market area demand. California’s two largest gas utilities, SoCalGas and PG&E declared high inventory operational flow orders for Wednesday’s gas day.

Clearly whatever triggered Monday’s run-up quickly vanished on Tuesday. Sources attributed the reversal to Nymex’s 35.4-cent decline Monday, the large amount of gas in the pipe and in storage, and to the temporary surge of warm air that blasted through the Midwest Tuesday. The warmth is expected to visit the Tennessee and Ohio Valleys on Wednesday.

“We were hit hard at pretty much every physical gate early on,” said a Canadian producer. “It just fell to some real lows suddenly. Chicago hit $5.50 at one point, which is about $1.40 less than what it was trading at times on Monday. Henry was down to $5.55 but had been at highs of $6.90 on Monday. Then it came back up to like the $6.30s late in trading. But it’s still way behind the Nymex.

“If you look at the forecast for Wednesday, there’s some pretty good heat rolling in and pushing the cold out of the Midwest and Northeast for a bit. Everyone was worried that there would be no demand. Most folks can’t put gas into storage because there isn’t any room. No one really knows what the market floor is right now” The producer noted. “But then some people came out buying. I guess they found some storage space or maybe plan to keep it in the pipe until later this week when the cold weather returns.”

There were some massive trading ranges on Tuesday because the sharp declines early in the session were followed by rebounds. “We’ve got half-dollar or more trading ranges on everything: Chicago, Alberta, Henry. It’s kind of crazy,” the producer said.

Nevertheless, the cash market is trading at an extreme discount to the near-month futures contract. El Paso Non-Bondad prices for San Juan Basin production, for example, ended the day about $2.20 cents less than December futures. Waha and Opal are in the same range. PG&E Citygate is nearly minus $2 compared to the futures contract.

“Near month futures and cash have to converge, but at this point it really doesn’t look like they can,” a Western marketer said. “We have the Thanksgiving holiday this month which will depress cash even further. We have no significant weather in the forecast. There are a few more days of cold weather coming up but nothing crazy. People are unlikely to give up on December futures as much as they are willing to push down cash prices. I think futures will crash but I think cash will get even worse. Storage can’t get any more full.”

This week’s gas storage report by the Energy Information Administration (EIA) will be released tomorrow, a day early, because of the Veteran’s Day holiday on Thursday. Most market prognosticators are expecting a 20 Bcf injection with a common range of potential injections of 10-35 Bcf and a five-year average of about 12 Bcf.

The National Oceanic and Atmospheric Administration said there were 87 heating degree days last week, 28 colder than the previous week and 14 more than the same week last year but 12 fewer than normal. In the last storage report, EIA estimated that working gas levels rose 44 Bcf.

Kyle Cooper of Citigroup said he’s expecting a 29 Bcf injection out of a potential range of 24-34 Bcf. Tim Evans of IFR Energy Services is forecasting a 30 Bcf refill.

“There is some chance of a bearish surprise here over and above the simple confirmation that the storage data is still not supportive,” said Evans. He also noted that the colder weather this week could produce the season’s first storage withdrawal, which could be a bullish market signal next week.

However, “the [futures] market’s big problem is still its valuation level relative to storage. Inventories last week were 7.8% above their five-year average level, while December futures at $7.50 are still some 65% over the five-year average price.”

Evans said Tuesday’s futures price action confirms a monthly reversal to the downside that could lead to further follow-through selling and “underscores the emerging bearish picture.” He sees a risk of December possibly plummeting to its $4.52 spot floor.

A lot probably will depend on the weather over the next couple weeks. While a warm front is expected to push some of the cold air out of the Ohio Valley and the interior Northeast, a cold front will push down into the Upper Midwest. Colder than normal weather also is expected over the Midcontinent. Across the rest of the country, temperatures are expected to be significantly mixed and in a broad range.

The National Weather Service’s 6- to 10-day forecast is now split with the western half of the country expected to be below normal while the eastern half is expected to see above-normal temperatures. The 8- to 14-day forecast has the below normal temperatures confined to the Southwestern quadrant of the nation and the above normal portion still over most of the eastern half. except for the East Coast and Florida.

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