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Midwest, West Coast Cash Points Spike; Futures Take a Tumble

Physical gas prices for Thursday delivery nationwide continued to bound higher in Wednesday's trading as intense cold, ice and snow dominated headlines, pipelines restricted deliveries and concerns surrounding end-of-season storage levels intensified (see related story).

Some locations in the Midwest registered increases as high as $35, but even West Coast points were tacking on $10 or more to push averages north of $20/MMBtu. PG&E Citygate added $14.57 to average $22.64, while SoCal Border jumped $11.91 to average $19.69. 

Futures prices started off strong but fell hard. At the close, March had fallen 34.5 cents to $5.030 and April was down 11.9 cents to $4.546. March crude oil added 19 cents to $97.38/bbl.

Pipelines across the continent were issuing multiple critical notices, too numerous to document, warning of pipeline restrictions as the cold deepened. Many of the operational notices were to continue through Monday, Feb. 10.

El Paso Natural Gas said late Wednesday it was at a "high risk" of declaring a "strained operating condition" or "critical operating condition" due to low linepack.

And late Wednesday NGPL invoked force majeure due to a mechanical problem with Compressor Station 309 in Bollinger County, MO in Segment 27 of Natural's Gulf Coast Mainline zone. "Any gas received south of Station 309 for delivery north of Station 309 (including transport associated with storage withdrawals) will be impacted during this force majeure event." The outage is expected to last at least through the end of February. Natural said it would schedule primary firm and secondary in-path firm transports to 89% of contract maximum daily quantity through Compressor Station 309. That percentage could change in succeeding days depending on pipeline conditions.

Gas on Alliance jumped $11.74 to $20.33, and deliveries to the Chicago Citygates were quoted at $27.45, up $18.86. Northern Natural Ventura came in at $43.82, up $34.45, the highest gains of the day posted by any market point. Demarcation was $26.65 higher at $36.11, and deliveries on ANR SW jumped $17.36 to $25.89.

Gas on Michcon changed hands at $22.06, up by $13.71 and deliveries to Consumers rose $18.28 to $27.20.

A Midwest utility buyer said "things are pretty crazy around here. We are hitting our LNG pretty hard and we still have lots of storage, but we would like to take more than we are permitted. Our storage is pretty good, but LNG is taking a hit.

"It's going to be down to minus 10 [Wednesday] night and minus 2-minus 3 Thursday night, and the rest of the week looks fairly cold. With spot prices hitting $25-30, you don't want to be playing in that game. We are using our peak shaving to try and get by."

The buyer noted that high prices on Northern Natural had hit $70.00 and “calling for allocations north of Palmyra, and that affects us and everyone further north. They are forcing us to allocate and it has been tricky getting gas through Demarcation and up to us. We are just trying to get as much gas as we can to our customers."

The Midwest utility curtailed interruptible customers on Jan. 27 and Jan. 28 and planned to curtail on Thursday, “but we haven't had to ask others to conserve,” said the buyer. “We avoid asking customers to turn down their thermostats at all costs.

A Houston-based marketer working the Chicago Citygates said it was getting more difficult to get gas into the area. Pipes were starting to "break" and LDC's such as Nicor and Nipsco were having to respond to difficulties on NGPL Midwest and ANR. "The LDCs are putting out their critical notices in response to the problems of the pipelines."

The marketer thought that interruptible customers into the Chicago Citygates were "probably" being curtailed, but "I don't see my customer base getting peeled off at all since they are all firm. I'm looking forward to March and trying to figure out how much [storage] carry we will have then."

Teri Viswanath, director of Commodity Strategy, Natural Gas for BNP Paribas said current conditions haven’t been seen in the last decade. “We are breaking cash delivered prices in nearly all consuming regions today. This is the sort of behavior that we witnessed more than a decade ago where ‘storage’ rationing sent prices higher in all regions of the country.  I just thought this development would occur as we neared the  end of February as low pressure in the storage facilities forced utilities to buy supplies off the market.  Fascinating (and more than a little disconcerting).”

Forecaster Wunderground.com predicted a high of 26 Wednesday in Chicago, dropping to 9 degrees Thursday before rising to 16 on Friday. The normal high in Chicago is 33. Kansas City's 11 degree high Wednesday was anticipated to fall to 9 degrees as well before climbing to 18 on Friday. The seasonal high in Kansas City is 40.

The National Weather Service (NWS) in Chicago said its "main forecast concerns will be with wind chills” Wednesday and Thursday nights “as an Arctic surface high dominates across the central Continental U.S.” NWS issued a wind chill advisory for western sections of the area for through late morning Thursday.

"Cold conditions will continue on Thursday as the...surface high shifts eastward from the Plains across the lower Missouri River Valley. This could yield wind chills in excess of minus 20 across most of  the county warning area into Friday morning as actual low temperatures fall several degrees below zero," NWS said.

In the East, gains were more nominal. Deliveries to the Algonquin Citygates rose $1.15 to $24.35, and gas at Iroquois Waddington was quoted at $21.70, up $8.49. Gas on Tennessee Zone 6 200 L gained $9.68 to $29.72.

Pipeline notices proliferated as fast as temperatures fell. According to Genscape Inc., notices were issued by Algonquin, ANR, Columbia, El Paso, Michcon, NGPL, Northern Natural and PG&E, as well as Tetco, Tennessee, and Transco.

Futures traders were grappling with Wednesday’s mind-numbing volatility.

"We had a [March] low of $4.99 and a high of $5.74, so that gives us a 75-cent range on the day on a commodity that started out the day at $5.37,” said a trader at Powerhouse LLC, a Washington DC-based trading and risk management firm. “That's volatility.”

He said the day's curious drop in the face of intense cold "might have been due to [unconfirmed] stories of a hedge fund exiting a position, not under duress." He also noted that "the mid-morning was when the big computer [weather] models do their runs, and when you see a big move at that time it is usually all the short-term traders going off wiggles in the models."

WeatherBELL Analytics in its Wednesday noon update to its 16-day forecast said the Global Forecast System “ensembles remain cold for the entire period in the major HDD [heating degree day] areas of the Midwest and East, but warming does spread into the Southern Plains for Week 2."

Market volatility may get another shot in the arm Thursday when the Department of Energy’s (DOE) Energy Information Administration releases it weekly storage report. All indications are that this week's draw will easily exceed last year's 129 Bcf pull and a five-year average of 151 Bcf.

United ICAP predicts a withdrawal of 280 Bcf, and a Reuters poll of 25 traders revealed an average 270 Bcf pull with a range of 250 Bcf to 282 Bcf. Citi Futures Perspective analyst Tim Evans calculated a decline of 258 Bcf.

No letup in sight is seen for the snow and cold attacking the Midwest and East. "A low pressure system will trek northeastward along the Eastern Seaboard on Wednesday, providing precipitation to a handful of states," said Wunderground.com meteorologist Kari Kiefer. "Heavy snow will be possible across northern Pennsylvania, New York and across New England, while ice storms are forecast to impact southeastern Pennsylvania and southeastern New England. A cold front associated with this area of low pressure will drive rain across the central and lower Appalachians, while showers and thunderstorms are expected to develop from Florida to the Carolinas."

The cold weather was anticipated to dominate the Midwest. "In the Central U.S., high pressure is expected to build over the northern Plains and the upper Midwest,” said Kiefer. “Early morning light snow will be possible in parts of the upper Midwest, while temperatures are expected to be 30-40 degrees below normal across the north central tier of the country. The southern Plains will also stay relatively clear of precipitation on Wednesday."

Tom Saal, vice president at INTL FC Stone in Miami, pointed out that the natural gas futures market “apparently...believes that the current 'tightness' in supply/demand balance is not temporary. Why do I think that? Simply look at next year's March/April spread, aka 'widow maker.’"

The March April 2014 spread settled Tuesday at 71.0 cents. The March April 2015 spread finished at 66.2 cents.

In his work with Market Profile, Saal expects the market to test Tuesday's value area at $5.327-5.171 before moving on and testing $4.949-4.879. He calculated the weekly breakout levels at $5.397-4.804. Traders were advised to buy if prices broke above the breakout levels or sell if they were below. The 50% breakout target higher is $5.694, and the 100% target is $5.990.

Tim Evans of Citi Futures Perspective said the current cold weather may have been aided as a market driver by "anticipation that Thursday's DOE storage report for the week ended January 31 may feature a substantial net withdrawal. Our model projects 258 Bcf in net withdrawals, but we've seen some higher estimates in the neighborhood of 275-280 Bcf from some pipeline flow monitors."

If Evans' forecasts are correct, the year-on-five-year deficit would rise to 725 Bcf by Feb. 21.

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