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Spot Prices Gain Ground on Cold Front Approaching Midwest, East

Spot prices rose anywhere from a dime to a dollar on Monday largely in response to a cold front that is expected to drop eastern temperatures to below-normal levels from Chicago to Florida starting Tuesday and continuing through Thanksgiving.

The largest daily price increases were seen in the Gulf Coast, with Southern Natural up more than 85 cents, Florida Zone 3 up more than a dollar and the hub up about 40 cents. Northeast quotes came in on the high end, while prices in the West, where temperatures are expected to remain relatively mild, were generally up 10-50 cents with a few locations outside that range. Chicago prices were up about 35 cents.

"MichCon and Consumers prices are about $9.90 right now, up from $9.50-9.60 for the weekend," said a marketer in the Midwest. "Temperatures are pretty mild right now, about the same as over the weekend, but it's going to get a little colder and it will be damp later this week, which tends to force people to turn up their thermostats. Looks like from tomorrow through the 25th is going to be about 8-12 degrees below normal, and that goes all the way down into Florida actually."

The Northern tier of states is expected to see much colder air later in the week. By Thursday, afternoon highs will be in the teens and 20s in Minnesota, Wisconsin and Michigan and in the 30s elsewhere in the Great Lakes and Midwest. The whole east side of the country is going to be hit with a cold front. Parts of Indiana and Ohio will get snow and there will be some pockets of much colder air in West Virginia and Virginia.

"In Michigan, we've been keeping our storage topped off to stay ahead of this cold," the marketer said. "Very seldom do prices go down with colder weather so we are out there today trying to get a few more packages lined up. It also helps the storage numbers look strong and that helps keep things in check. If everybody did that we wouldn't have these big swings all the time when we do have colder temps."

Meanwhile, western Canada is seeing abnormally high temperatures and that appears like it will continue. "Station 2 was trading about 35-40 cents behind AECO, which would allow gas to flow eastbound to Alberta, either to Alliance or straight to the Nova pipe," said a Canadian producer. "I'm going eastbound just based on where prices are. We have a fair bit of gas at Station 2. There seemed to be some packing going on at the Westcoast system because of the mild weather we're having up here.

"It was supposed to be 59 degrees today compared to normal in the 30s. Tomorrow they are calling for us to reach close to 70 degrees and this is the end of November. I'll be able to get my Christmas lights up no problem this year. When you get weather like this, you get out there and get them up because it could be minus 30 tomorrow."

The gas futures market was choppy on Monday with a more than a 50-cent trading range, but December futures ended up losing 8.3 cents to end at $11.331. The cash market is still well below the screen. The continuing rise in storage and offshore production and the recent mild weather has kept downward pressure on cash.

The Minerals Management Service (MMS) said Monday that a substantial amount of offshore Gulf of Mexico gas production was restored over the weekend. About 378.73 MMcf/d of gas supply was returned to service, dropping shut-in statistics down to 3,269.28 MMcf/d compared to 3,648.01 on Friday. Crude oil shut-ins dropped to 633,064 bbl/d from 717,807 bbl/d on Friday. MMS said six platforms and four rigs returned to service, leaving 139 platforms and one rig offline. Cumulative gas shut-ins since Aug. 26 now stand at 463.863 Bcf.

Golden, CO-based consulting firm Bentek Energy reported Monday that about 3,338 MMcf/d of production appears to be shut in onshore and offshore Louisiana based on gas receipt nominations on 20 major gas pipeline systems. Meanwhile, 829 MMcf/d more gas production was scheduled to flow Monday onshore and offshore Texas than was scheduled on Aug. 26 before the hurricanes hit. Texas producers have been cranking up the volumes to make up for lost Louisiana supply. When considering the increased Texas supply being nominated to flow, Bentek said total Gulf supply (onshore and offshore) is only down about 2.5 Bcf/d compared to levels on Aug. 26.

However, nominations on all the major Louisiana pipeline systems save one, Destin, are below where they were on Aug. 26. The biggest shut-ins remain behind the Tennessee Gas system (1.3 Bcf/d). Bentek said the cumulative shut-ins upstream of Tennessee alone total 134.4 Bcf., with the next highest total behind sister company Southern Natural at 63 Bcf. Bentek said total cumulative production shut-ins onshore and offshore now stand at 457.6 Bcf.

Despite all that deferred supply, however, storage levels remain 179 Bcf, or 6%, above the five-year average and are likely to continue making gains compared to historical levels, according to analysts. "I think we'll get another injection in storage this week," the Midwest marketer said. "It wouldn't surprise me to see 20 Bcf. It was mostly mild last week until the last two days. Last week I think people were still trying to top off storage with the cheaper prices that were available. Most of the week we couldn't even flow gas on the utility systems because they were at capacity. Prices got down to $8 in Michigan and we couldn't take advantage of it."

Analyst Kyle Cooper of Citigroup said he's projecting that weekly storage will remain unchanged this week. Consultant Stephen Smith is projecting a 7 Bcf withdrawal from storage for the week ending Nov. 18. "This projected draw compares with a normal seasonal draw of 49 Bcf (based on 1994-2003 norms)," Smith said in his Weekly Gas Outlook. "This 7 Bcf draw versus a normal 49 Bcf draw implies that 'season storage versus 10-year norms' will increase by 42 Bcf...

"We are projecting a gas storage surplus of 332 Bcf for Nov. 18. This represents an increase of 237 Bcf in only a six-week period, the combined impact of 17% below normal [heating degree days] for this period plus various 'demand destruction' effects more than offsetting the 4.6 Bcf/d of Katrina/Rita shut-in gas." Smith said he expects the storage surplus versus 10-year norms to grow to 340-350 Bcf by early December, assuming normal heating degree days (HDD).

"For the two weeks ending Dec. 2, daily HDD forecasts indicate seasonally cold weather on average. If this proves correct, and the December HDD outlooks of more forecasters are reasonable, then there is less downside risk from mild temperatures in the weeks ahead, but further erosion of crude prices remains a potential contributor to weaker gas prices."

Smith is projecting a January Henry Hub bidweek cash price of $10.25. January futures tumbled 20.1 cents Monday to $11.87. January crude gained 49 cents, ending the day at $57.70.

"Lower oil prices may add to the downward pressure on gas prices," said Ron Denhardt of Strategic Energy and Economic Research. "There is anecdotal evidence that substantial volumes of crude oil are at sea. In addition, tax considerations may cause integrated oil companies to draw down crude inventories.

The other significant bearish factor is demand destruction. Denhardt said judging from recent storage injections gas consumption this winter could be down 4-6 Bcf/d compared to demand last winter. "Up to 2 Bcf/d of this lost consumption could be caused by industrial facilities shut down because of hurricane damage," he said. "The remainder is a response to high prices."

"Unless the weather is extremely cold, the strong demand response to prices and downward pressures on oil prices are expected to cause natural gas prices to decline, perhaps substantially, during the next few months," said Denhardt.

But as usual, a lot will depend on the weather and current near-term predictions are bullish. The latest six- to 10-day forecast from the National Weather Service's Climate Prediction Center has the country split right down the middle, with the high consuming regions of the East experiencing below normal temperatures and the West experiencing above normal temperatures. The eight to 14-day outlook has the entire country except for California, Nevada and parts of the Southwest experiencing below normal temperatures.

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