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Cash Prices Drop Sharply on Continued Warmth, Falling Futures

Temperatures were dropping Friday over the Midwest, Midcontinent and Rockies but were still either slightly above normal or seasonal. And without much colder weather on the horizon and demand already way down this month, gas prices continued a sharp retreat Friday with points in the Northeast and Gulf Coast down 15-40 cents, Midcontinent and Midwest locations off 10-60 cents and the West down 20-80 cents.

Near-month futures also lost ground. The December contract ended down 16.1 cents to $7.794.

Gas demand (including Mexican exports) has fallen a whopping 14.5 Bcf/d since levels on Nov. 2, according to Bentek Energy's new Supply/Demand Balance report, released for the first time on Friday (see http://www.bentekenergy.com). Bentek Energy officials said the report is the only source of actual and timely daily gas supply and demand data collected from pipelines nationwide. The report shows that for the week ending Nov. 10, gas demand fell from 64 Bcf/d on Monday to 57.5 Bcf/d on Friday and the warmer weather was mostly to blame. On Nov. 2, demand was 72 Bcf/d.

With demand dropping rapidly, the need to import gas from Canada also has fallen sharply. Bentek shows Canadian gas exports to the U.S. are down 13% this month to about 7.7 Bcf/d compared to levels in November 2005. Last Monday about 8.1 Bcf/d of Canadian gas was being imported, but on Friday imports were down 1 Bcf/d to 7.1 Bcf/d.

The weather has been so much warmer than normal during the past week that Bentek's report is showing about 4.7 Bcf of gas had to go into storage because consumption was inadequate and there was no other place for all that supply to go. "It would amaze us if the EIA did not report an injection for this week in the next storage report," said Bentek Chief Technology Officer Rusty Braziel.

If the winter weather doesn't show up over the next few weeks, the market could be in for some significant additional downward pressure on prices, said Bentek President Porter Bennett. He noted that since September, the significant number of nuclear plant outages due to maintenance has boosted gas demand about 2 Bcf/d. Demand from power generation has been running about 5 Bcf/d greater than during the same period in 2005. There also has been higher industrial gas use. But Bennett expects those factors to vanish quickly in the coming weeks, and if there isn't a corresponding boost in heating demand due to the arrival of normal winter weather, prices certainly will head south. He noted that many forecasters are expecting a mild winter.

The current six- to 10-day forecast clearly has a bearish slant. It shows no areas of below normal temperatures from Nov. 16-20 and two large areas of above normal temperatures, one covering nearly the entire western two-thirds of the nation except the Pacific Northwest, the Northern Rockies and Upper Midwest, which should see normal temperatures. Above normal temperatures also are forecast for the Northeast. Normal temperatures are expected over the rest of the country.

Although there was a strong recovery in Rockies prices during the week, prices there are likely to backtrack again, according to Bentek. Opal ended Friday down only about 40 cents from where it was the previous Friday despite bottoming out near $1.25 at one point during the week. Warm weather and excess supply has been to blame. Gas production has grown so rapidly that pipeline capacity additions cannot keep pace. Maintenance outages on Kern River and Northwest during the week didn't help, but lack of adequate export capacity will continue to be a serious issue this winter. Until the Rockies Express pipeline enters service, Rockies producers can expect continued depressed conditions. And even with the completion of the Entrega portion to the Cheyenne Hub in January, most excess Rockies gas still will be locked up at the Cheyenne Hub.

Bentek shows Greater Green River Basin gas production up about 500 MMcf/d this year compared to last. Uinta-Piceance Basin production is up 311 MMcf/d compared to last year. And the Powder River Basin is up about 160 MMcf/d. That's about a 971 MMcf/d increase in production in the Rockies compared to levels last year without a corresponding increase in takeaway pipeline capacity, Bentek noted. Production growth in these western basins is the primary reason that total U.S. gas production is up about 1.8% so far this year, Bentek's data shows. Production increases have been much smaller in other basins -- although producers also have gained ground in the Appalachian Basin, where production is up about 14% compared to 2005 levels.

With power generation demand dwindling and inadequate heating load, more supply will be forced into storage leading to even greater storage surpluses and probably even lower prices.

Veterans Day also contributed to the market weakness on Friday. Several traders reported four-day deals being done on Thursday and lower trading volumes Friday. "Prices started very weak but then started to come up a bit. Opal was right around $5 but Sumas was about $1.80 higher because of the colder temperatures in the Pacific Northwest. However, it's not that cold and although a cold front is coming into the Midwest and the Pacific Northwest is getting another storm, it's not going to be that cold next week so I don't see prices making a run higher from here."

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