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Rita Triggers Ultra Volatility in Cash Market, $6 Trading Ranges in Northeast

With Rita fast approaching Gulf of Mexico infrastructure, gas production shut-ins rising rapidly and many traders in transit, the cash market was extremely volatile and illiquid on Thursday. Trading appeared to completely dry up at many locations. Some Northeast averages were more than $5 away from others. Most western locations fell 25-60 cents.

The Henry Hub, which had about a $3/MMBtu daily trading range and average in the $15.20s, was a good example of Thursday's volatility. Multiple New England points came in with $1.50 negative basis spread to the hub.

Prices across the entire West, however, were down. Chicago was off more than 40 cents to the high $12.50s. El Paso Permian dropped more than 70 cents to the $11.90s, and PG&E Citygate was down nearly 30 cents to slightly more than $11.

"It was crazy today," said a Northeast marketer. "The story of the day in New England was very, very weak pricing. There seems to be a lot of gas around and few buyers. There was a lot of selling at the New England citygates. But Tetco M3 and Transco Zone 6 held some pretty good values. The other points got absolutely clobbered. There were very strong cash prices in the Gulf."

The Minerals Management Service said production shut ins offshore in the Gulf of Mexico reached 6,594.95 MMcf/d of gas and 1.4 million bbl of oil. A total of 605 platforms and 87 rigs were evacuated as off 11:30 a.m. CDT. That's about 74% of the total platforms and 65% of the total number of rigs in the Gulf. Those numbers probably will climb on Friday.

Denver-based consulting firm Bentek Energy, which tracks daily and intraday nominations on the nation's natural gas pipelines, reported total onshore and offshore Gulf shuts ins stood at 8,279 MMcf/d Thursday morning. Bentek said that only 5,541 MMcf/d of gas was scheduled to flow on Thursday compared to 13,820 MMcf/d on Aug. 26 before Katrina's arrival.

The High Island system offshore Texas was completely shut in Thursday, taking nearly 400 MMcf/d of gas flows offline. HIOS also was not receiving the 270 MMcf/d it normally receives offshore Louisiana. Sharp declines also were seen in Texas flow nominations on Transco (down to 667 MMcf/d in Texas from 1,017 MMcf/d on Tuesday), Tennessee (635 MMcf/d Thursday compared to 714 MMcf/d Tuesday) and Texas Eastern (477 MMcf/d compared to 966 on Tuesday).

The Louisiana picture was even worse with Mississippi Canyon, Garden Banks, Stingray, Nautilus, Gulfstream, HIOS, Chandeleur, Destin and Texas Eastern's Venice lateral receiving nearly no production Thursday compared to a collective total of more than 2.7 Bcf/d on Aug. 26. Shut ins on Tennessee Gas in Louisiana now stand at a whopping 1.86 Bcf/d, while Transco's gas production receipts are down 1.26 Bcf/d compared to flows on Aug. 26, Bentek reported.

Bentek estimates that cumulative production shut-ins since Aug. 26 now total a massive 134.4 Bcf onshore and offshore Louisiana.

The lost gas flows have forced many eastern buyers to bring as much Appalachian and Canadian gas to market as possible. "I bought some gas off Niagara because of the substantial cuts on Tennessee Gas Pipeline," said a Northeastern utility buyer. "Not a lot of deals were getting done. You could drive a truck through the spread right now on [Intercontinental Exchange]. At Tennessee Line 800 for example, the bid is $12 and the ask is $14.80."

He reported no luck getting gas off of Tennessee's 500 leg, which suffered extensive shut-ins and damage from Katrina. The problem is not only with the quantity of gas on the system, but also with the quality of the gas, as the Toca (1,100 MMcf/d), Venice (1,300 MMcf/d) and Yscloskey (1,850 MMcf/d) gas processing plants remain offline. Shippers also are starting to see problems on the Tennessee 800 and 100 legs as well, which flow out of western Louisiana and South Texas, respectively.

Gas was being allocated at all of Transco's major compressor stations. "Transco Z6 New York seems to be just about the highest price point out there right now," the utility buyer said. "It began the morning at $18.50 [on ICE], but has since come off to $16."

In addition to the sharp reduction in trading personnel Thursday due to evacuations from Houston, high gas prices also have caused significant demand to dry up. Evidence of that was in the weekly gas storage injection of 74 Bcf, which was higher than expectations. The ICAP storage options auction on Wednesday, for example, ended at 69 Bcf. The storage injection during the same week last year was 68 Bcf. Working gas levels now stand at 2,832 Bcf, exactly 100 Bcf below levels at the same time last year, but 92 Bcf above the five-year average. Working gas in the key eastern consuming region is 1.7% higher than the five-year average, but 2.7% below levels at the same time last year.

"Due to our continuing commitment to inject gas and because we came out of the winter with a relatively high level, we remain on pace to reach November with a comfortable amount of gas in storage," the Northeast utility buyer said.

However, it's hard to believe that utilities will want to continue actively buying spot market gas for storage with prices at these levels.

Most of the traders left in the market on Thursday were trading four-day strips for Friday, Saturday, Sunday and Monday gas flows. "I think the market would have been even weaker had we not been trading the four-day strip," said a Canadian producer. "Not many folks want to pay these prices. It's safer to pull gas out of storage right now in the Chicago area than to buy gas, because for one thing it is available and it's also not going to cost you an arm and a leg.

"We'll be in the office tomorrow but there will be no cash trading, except maybe a few intraday deals, nothing significant," he said. "There wasn't much traded today. Volumes were way down, and I did not get nearly as many calls as I usually get. Everyone is in transit out of Houston. We did a lot of dailies yesterday and a lot of people just baseloaded up and got out.

"There are still pretty good spreads everywhere so if you can go west to east it is going to work for you. A lot of people are buying Canadian gas and shipping it to the Northeast if they can. Not many people are getting cut in Chicago because few are relying on Gulf gas," he said.

However, some Southwestern markets as far away as New Mexico and the southern Rockies were feeling Rita's wrath. Duke Energy and some other large southwestern gas processors and midstream companies were shutting down southwestern processing plants. Without Texas liquids handlers there simply was no where to take their NGL, and without the processing plants, western producers were being forced to shut in their production. One Denver marketer was surprised that a Gulf of Mexico hurricane that hadn't even made landfall yet was forcing southwestern production shut ins. Markets in New Mexico were scrambling to find supply replacements in the Rockies, the San Juan Basin and elsewhere.

El Paso said it was willing to work with processors to accept higher Btu supply on its pipeline systems but its ability to do so was "very limited" (see Transportation Notes).

With Rita barreling right across the center of the Gulf, nearly all Gulf of Mexico production will be shut in at least temporarily. While Rita weakened to a Category Four hurricane with 145 mph winds and could weaken further, her track ensures she will affect a much broader area of the Gulf than did Katrina.

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