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Futures Drop Below $11, But Shut-In Levels Remain Flat

Despite continued stagnation in terms of shut-in returns from the Gulf of Mexico, October natural gas futures continued to explore lower on Tuesday, testing support lines and settling below $11 for the first time since Hurricane Katrina hit at $10.763, down 26.8 cents from Monday.

In fact, after trading lower in the overnight Access session, the prompt month only logged a high on Tuesday of $10.99. The low of the day of $10.69 was seen as some as a test of the gap set Monday Aug. 29, when the market opened at $10.65 after only hitting a high Friday Aug. 26 of $10.05.

"Clearly the market has weakened significantly over the past few days and I think you could say that Tuesday's $10.69 trade was close enough to test the gap at $10.65," said a Washington, DC-based broker. "Closing at the lower part of the day's range is not a very bullish signal. I tend to think that barring a change in the regular weather, we will likely venture into the gap on Wednesday and attempt to work our way down there.

"On Monday we broke through into the upper end of the support zone. On Tuesday, we saw another negative day and a close near the lows, which really wasn't the sign that bulls or buyers wanted to see to step in and take advantage of the dip. There clearly was no bullish counteraction to the first initial breaking of the support line."

On Tuesday, two senior Bush administration officials warned of possible natural gas shortages because of the slow recovery following Katrina (see related story). The slow recovery claims were echoed by the Minerals Management Service (MMS), which showed shut-in gas remained almost unchanged at 3.720 Bcf/d, or 37.20% of daily gas production offshore, compared with Monday's shut-in report of 3.784 Bcf/d.

There were other influences generating market pressure. In an unprecedented move, most of the major Texas utilities have pledged not to pass on to customers the Katrina gas price spike. The action was taken to avoid a state-mandated cap on fuel prices for electric generation in the wake of the hurricane (see related story).

"On just the raw numbers, Katrina had a greater impact than Hurricane Ivan in terms of initial gas shut in and the amount still shut in 10 days after the storm," the broker said. "However, the thing you have to remember is with Katrina there was massive demand destruction. New Orleans is approximately the 26th largest city in the country and it is entirely offline. It's not New York, but it is also not nothing. It's a little bit of a counterbalance. The other difference is that with Ivan, the shut-ins were related to ocean floor pipelines, while with Katrina we are talking about gas processing plants on shore being offline.

"The real rally last year with Ivan was when shut-ins became stagnant around 2 Bcf and change per day. Once the market sensed that gas was going to be offline for a long time, people began to run calculations on total losses and the price rally began in earnest. This year, I think people are already beginning to run those calculations."

The recovery from Katrina is not as robust as that from Hurricane Ivan. Katrina's 150 miles per hour winds pounded Gulf production facilities and 10 days afterwards shut-in production stood at 4.02 Bcf/d. Lost production peaked at 8.8 Bcf/d on Aug. 30. Output lost to Hurricane Ivan in 2004, which peaked at 6.5 Bcf/d on Sept. 16, was down to 2.35 Bcf/d within 10 days, the closest comparative date for an MMS report on that storm.

Somewhat lost in the swirl of attention paid to hurricane-related supply-demand issues is the fact that it is still summer, and warm weather and increased electrical loads are firmly in place this week. The large energy markets of the Mid-Atlantic and industrial Midwest are forecast to endure warmer than normal temperatures, according to the National Weather Service (NWS). Just at a time when the industry would prefer to give inventories a hefty seasonal boost prior to the onset of winter heating demand, cooling demand raises its ugly head. For the week ended Sept. 17, the NWS forecasts 41 cooling degree days (CDD) or 27 more than normal for the Great Lakes states of Ohio, Indiana, Michigan, Illinois and Wisconsin and 38 CDDs or 24 higher than normal for New York, Pennsylvania and New Jersey.

It's been a long, hot summer in those sections of the country. To date, the Great Lakes states have labored under 868 CDDs or 195 more than normal. New York, New Jersey, and Pennsylvania have also endured 868 CDDs or a whopping 243 more than normal.

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