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Northeast Prices Continue to Vault Higher; Futures Ease

Overall physical prices rose 9 cents Wednesday, but the Northeast continued to grab the spotlight as pipeline maintenance, forecasts of hot temperatures and nuclear outages all combined to send some next-day gas prices higher by more than a dollar. Eastern points were mixed. At the close of futures trading July had eased 2.8 cents to $2.517 and August had slipped 1.9 cents to $2.555. July crude oil tumbled $2.23 to $81.80/bbl.

"The market's going crazy," said a Northeast marketer. "There's a lot of heat along with pipeline outages, but they postponed the maintenance on Tennessee so that was helpful. It increased the supply by 400 MMcf so that helped a lot. If you have gas around there, it's coming in pretty cheap. When you are selling $8 to $9 gas and sourcing $4 gas and you've got the transport, it's hard not to get hurt too bad. Gas on Iroquois Waddington was $4.10, so if you can bring it down to Tennessee and get $8 [that's profitable], but you have to have the transportation.

"Tomorrow [Thursday] is expected to be hotter, and that's why prices jumped up. Friday came in a little warmer than what we saw [Tuesday], but we expect it to come off by the weekend."

Wunderground.com forecasts the high in Boston Wednesday of 96 will ease to 93 by Thursday and 88 on Friday. The normal high for Boston at this time of year is 78.

According to the NGI NRC Power Reactor Status Report, nuclear outages in the Northeast and East continue to be a factor. Monday afternoon the 506 MW Vermont Yankee power plant was reduced to 36% capacity because of an electrical failure in a generator that regulates the flow of reactor cooling water. Wednesday the reactor was up to 45%, but no indication was given when the unit would return to full power. The facility is located about five miles south of Brattleboro, VT. On Tuesday the PPL Corp.1,090 MW Susquehanna 1 plant was dropped to 30% of capacity for investigation of a minor water leak, but on Wednesday it had dropped to 0% output. The Susquehanna unit is about 80 miles northwest of Philadelphia.

Next-day gas on Algonquin jumped more than $1.70 to settle above $8.75 and quotes on Tennessee Zone 6 200 L were up by about a buck and a half. Dracut posted a gain of over $1.70, while Iroquois Waddington managed a gain of just over a quarter.

At other eastern points price movements varied greatly. Gas into Transco Zone 6 New York surged almost 70 cents, but deliveries to Tetco M-3 shed almost a nickel.

Remove the multi-dollar price moves of the Northeast from the tally, and overall gas prices Wednesday rose about 2 cents.

In the nation's heartland, next-day prices were steady to lower. Thursday deliveries on Northern Natural Gas Ventura eased a penny, and gas into the NGPL Midcontinent Pool was off a couple of cents, as was Oklahoma Gas Transmission. Panhandle Eastern was flat.

"It's hot here, too," said a Midwest gas buyer. "The electrical generators have been running and that has helped keep the prices up a little bit. They ran on Monday and Tuesday with some pretty heavy loads, but they are sporadic and you never know for sure if they are going to take gas or not."

Futures traders appear to be factoring in another reduction in the storage surplus when the Energy Information Administration releases its 10:30 a.m. EDT report on natural gas inventories Thursday. Recently, natural gas has made inroads to coal-fired generation's share of the overall power generation market, but the extent to which this can continue is up for debate.

Industry consultant Bentek Energy said the surplus "is now decreasing quickly as a result of a warmer-than-average spring that has brought increased power burn demand." It said that according to its figures, "power burn demand is up almost 5 Bcf/d in 2012 compared to 2011."

For the week ended June 15 Bentek predicts a withdrawal of 67 Bcf, and a Reuters survey of 28 traders and analysts showed a 64 Bcf average with a range of 59-68 Bcf. Citi Futures Perspective is looking for an increase of 61 Bcf. Last year 90 Bcf was injected, and the five-year average stands at 87 Bcf.

If the observations of one producer are correct, large storage surpluses may be a thing of the past as domestic production drops precipitously. For the moment, though, the Haynesville Shale of East Texas and Louisiana has the attention of producers throughout the country as its high productivity continues to far surpass other areas of the country and thwarts efforts to lower a large storage surplus. That may soon change, however. "The combined Barnett and Haynesville is about 12 Bcf/d, and when that rolls over [starts declining] we may start to get production under control," said a Rocky Mountain producer.

"The Haynesville is hugely dominating. The Haynesville Shale is productive and producing dry natural gas. [It dwarfs the] "55 rigs drilling in the Permian, 38 in the Bakken and seven in the Texas Gulf Coast Eagle Ford," the producer said, citing a Bentek Energy report.

"This is the problem, the darn Haynesville, but its only 10% liquids, so its [production] is going to fall off a cliff if it already hasn't. Once we get that production under control, the Barnett is going to roll over, too. All wells are in some state of decline, and at some point the decline is going to have a tidal wave effect. We are not even [at] 600 [gas] rigs drilling, and you are not going to stop the decline with that few rigs drilling. Liquids prices are also dropping and they have been carrying the day for the economics of these gas wells. Take away the economics of the liquids and [gas] production may keep plunging."

Some say that considerably higher prices may be necessary to support required gas drilling. "[Chesapeake Energy CEO Aubrey] McClendon and other guys say you cannot make money in the Haynesville at less than $6. You have an 80% first year decline rate; gathering and transportation is $1.50, and most of these guys are paying $20,000 an acre and a 20% override [royalty]. You can't make money in the Haynesville at less than $6 unless you are in the small window which has liquids, which is 10% of the play," the producer said.

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