Both cash and futures advanced Monday as cash traders reacted to a variety of factors ranging from somewhat cooler weather to nuclear outages. Futures advanced primarily on short-covering and revised weather forecasts, but traders are skeptical the gains will last. At the close March had gained 5.1 cents to $2.550 and April had risen 6.1 cents to $2.738. March crude oil fell 93 cents to $96.91/bbl.

Overall, physical prices rose by about nine cents, but double-digit gains were posted by West Coast points following the outage of San Onofre Nuclear Generating Station units 2 and 3 in southern California (see related story). “One unit was down for a refueling, and the other was off because of tube leaks. That is pushing California prices higher,” a West Coast trader said.

Those higher quotes may be around for awhile, but it depends on how long the outage is in place. “If it’s just tube leaks, it could be as short as three to four days, but it sounds like the problem is quite extensive so it could be awhile.”

Southern California points surged. SoCal Border was up 15 cents, and the SoCal citygate 18 cents or so.

Gas at major pipelines serving Southern California also rose. On El Paso Permian parcels were bid 10 cents higher.

Prices were firm in the Midcontinent as somewhat cooler temperatures moved in. “It was cool through the weekend and I think part of the strength is switching from coal to gas,” said a Midcontinent marketer. Gains were noted on Panhandle up about 6 cents; NGPL Midcontinent was also higher by about 6 cents; and ANR SW averaged some eight cents higher.

Forecaster predicted the high of 56 in Oklahoma City would fall to 49 by Tuesday and 38 Wednesday. The normal high in Oklahoma City at this time of year is 51.

Prices at New England points registered hefty gains as pipelines limited deliveries. Algonquin Gas Transmission issued a critical notice restricting nominations upstream of its Cromwell Compressor Station for delivery below.

Algonquin citygate deliveries traded about 20 cents higher, and Iroquois Waddington rose by a dine. Gas to Dracut jumped more than 20 cents.

Futures traders were somewhat dismissive of the day’s gains. “I think you are seeing just a bit of short-covering, and I think we should be back at $2.40 by Wednesday,” said a New York floor trader. He added that he didn’t think the market could get above $2.62 to 2.63 before “it comes back off.”

Longer-term weather patterns, however, show a cooling trend. Commodity Weather Group in its 11- to 15-day outlook predicts below-normal temperatures west of a broad arc from western Montana to Kansas and Nebraska and as far south as West Texas.

“The weekend was tough for model consistency and consensus as we saw significant spread in options for the next two weeks,” said Matt Rogers, president of the firm. “The big story from Friday’s forecast is that the big Midwest to East warming that was expected to dominate the six-10 by [Monday] is a fair amount weaker now with more pattern variability. Also, the 11-15 day is seeing faster and stronger expansion of colder weather to the western two-thirds of the U.S. per the European ensembles. Caution is employed on our forecast for the upper Midwest, Plains and Calgary given the struggle to build/sustain a significant cold air connection. But the base of the new cold trough — toward the Southwest/Four Corners — could be stronger/colder.”

Government figures showed a movement by directional traders to the long side of the market by about a 2:1 margin. The Commodity Futures Trading Commission in its Commitments of Traders Report for Jan. 31 reported that managed money at both exchanges had increased both short and long positions.

At IntercontinentalExchange, long futures and options (2,500 MMBtu per contract) rose 71,468 to 533,135 and short holdings grew by 32,609 to 239,528. At the New York Mercantile Exchange, long futures and options (10,000 MMBtu per contract) added 13,037 to 223,977, and short contracts rose by 7,041 to 298,264. When adjusted for contract size, long futures and options increased 30,904 and short positions rose 15,193. For the five trading days ended Jan. 31, March futures fell 9.8 cents to $2.503.

Market observers note that there have been rumblings of capital projects that are considering switching their fuel requirements to natural gas.

Morgan Stanley analysts suggest that the Southeast and Mid-Atlantic regions may be prime candidates for coal-to-gas switching for power generation. Utilities analysts Stephen Byrd and coal analyst Wes Sconce said in a report that these regions were ripe for the most switching, noting that the Southeast, which has the highest delivered coal costs nationally, should be “the best test case.” Even though PJM has some of the lowest delivered coal costs ($3.10-3.25/MMBtu), with $2.70 prices gas becomes “very competitive” (see Daily GPI, Feb. 6).

More deferred contracts may see buying interest. “There have been stories of major projects that will utilize energies other than natural gas put on hold because of the current relative cheapness of natural gas. If some of these major projects shift to using natural gas rather than coal, we could see an interest in longer-dated term buy interest, an interest that has been absent for quite some time,” said Mike DeVooght, president of DEVO Capital, a Colorado-based trading and risk management firm. “On a trade basis, we will continue to hold current positions and view any significant rally from current levels as an opportunity to do some forward sales in the summer strip.”

DeVooght counsels trading accounts and end-users to stand aside, and producers and other physical market longs should hold the remainder of a November-March option strip consisting of long $4.75 puts offset by the sale of $7 calls for a 16- to 20-cent debit.

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