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Colder Weather Prompts Cash Rally with 10- to 75-cent Increases

Cash prices staged a solid rally Monday, jumping 10-75 cents in response to the return of colder weather in major midwestern, Midcontinent and northeastern markets and to a spike in futures prices.

High temperatures at some places in the Northeast and Mid Atlantic were expected to fall more than 30 degrees over the first couple days of the week, with Washington, DC, for example dipping from a high of 83 on Monday to the low 50s by Wednesday. Lows were expected to be back below freezing again by Tuesday night after being in the mid 50s over the weekend. In Chicago, highs were expected to tumble 25 degrees from Monday to Thursday.

The biggest cash price increases (35-75 cents) were seen at northeastern points Monday -- Transco Zone 6 New York reached the low $7.40s -- with solid 30- to 50-cent gains in the Midwest and Midcontinent and much smaller moves in the West.

"We got quite a little breakout in the Nymex. Technically we had support, and now we have some cold in the six- to 10-day and 11- to 15-day reports," noted a Canadian producer.

The area of below normal temperatures expected in the United States expanded significantly in the latest six- to 10-day forecast. It now includes the entire country except the Southeastern quadrant and much of Texas, which are expected to see normal temperatures. The only area of expected above-normal temperatures is in the southern tip of Texas, the National Weather Service said.

"We've consolidated for almost a month now and it's finally getting a little colder than normal in some of the markets," the producer noted. "In Calgary, it's about 5 degrees above zero Fahrenheit and that's a little colder than normal. But if you get into the Northeast, they actually look quite cold toward the end of the week. That's providing some support.

"Pipes to the Northeast have been running close to variable costs over the last few weeks, but I think they will be improving with this weather over the next week. We'll have to see how long it lasts. We still have a lot of gas to get out of storage," he noted.

A Northeastern LDC said the price increases Monday were largely unjustified because "colder than normal in March means something different than colder than normal in January." In addition, he noted that there's still so much gas left to remove from storage. "We've been cutting a bunch of gas supply just to get down to our minimum ratchet levels in storage. We're still backing out of our purchases. Luckily we have contracts for supply that we're swinging. The storage withdrawals have to be maintained."

However, he noted that the current spreads to the winter months are attractive, with November futures, for example, trading $2.08 more than April futures on Monday afternoon. January futures on Friday was $3.836 more than April. "Once we hit our storage ratchets, we may look at buying gas on spreads if future prices still look attractive. Some people can inject, and the spreads warrant that. I would think near-month prices will come back down and make those spreads even more attractive. The general trend is still going to be bearish despite today's little rally."

Working gas levels in storage should end the winter heating season at 1,717 Bcf, or about 478 Bcf higher than levels at the same time last year and 226 Bcf higher than the record high for season ending working gas of 1,491 Bcf set in April 2002, according to gas consultant Stephen Smith. "Mild weather and post-price-spike conservation of the last few months has pushed the current storage surplus (compared to a 10-year average) to a projected 842 Bcf, a level which is more than twice the year-ago storage surplus," Smith said in his Weekly Gas Outlook. "As a result, last week's gas-to-[residual fuel oil prices spread] was a negative $1.19/MMBtu. Any negative spread is a rare occurrence...but the current surplus now ranks as the largest in at least the last seven years."

Smith said even a late cold spell in the Northeast and an early hot spell in the South this spring won't reduce the storage surplus to what it was last year in late June. "If instead, there were to be a mild rather than cold northern spring and a mild rather than hot southern spring our model shows that storage could reach 2,850 Bcf by June 30 ( a level normally not reached until the start of October)."

As a result, Smith is predicting that prices will have to weaken further. He expects July Henry Hub bidweek prices will average $6.00-6.50 compared to a current July futures contract of about $7.38.

Despite the price spikes on Monday, basis actually weakened in Chicago and the Midcontinent. Current daily basis Chicago was in the low minus 40s compared to the high 60s on Friday. Fixed price Chicago gained about 40 cents to the low $6.40s.

Rockies basis remained relatively flat with Opal at about $1.08 Monday afternoon after rising nearly 20 cents to the mid $5.70s. SoCal Border also gained about 20 cents to nearly $6. PG&E Citygate was weaker, adding only about a dime.

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