Winter Shows Up, Boosting Futures, Cash

The sudden 20-cent jump in gas futures prices yesterday initially left most of the cash market behind with cold weather currently confined mostly to the Rockies and upper Midwest. However, late in the day cash prices gained enough ground to boost daily averages up about a dime.

The western cold front is poised to make its way east, and a new forecast by the National Weather Service shows below normal temperatures across a large part of the country over the next six to 10 days. The market may have found enough support for the rest of this week and possibly into next.

There still are huge spreads between current cash and December futures. "Cash was quite weak today compared to the strength of the Nymex," one trader noted. "Prices in Chicago have been 25 to 30 cents behind the screen. Weather seems to be on the horizon, but it hasn't really been affecting the cash prices yet."

Several observers admitted being surprised by the Nymex jump at the open given the absence of significant fundamental news until the NWS report late in the afternoon. "I'd say we were a little thrown off guard given the previous day's decline. The Henry Hub range was $4.63 to $4.73 with most of the morning in the mid-60s and later deals above $4.70," said a Gulf Coast region marketer. "Tetco West LA, which spent most of the morning around $4.48, was bid as high as $4.65 at the end. That was a big move late. We're still seeing a 30-cent spread on the hub compared to futures. There's plenty of reason to buy gas and store it or keep that gas in the ground if you have it."

As always, the AGA storage report will be a major factor influencing prices for the remainder of the week and perhaps longer given that this report probably will show the last or second to last net injection for the year. Early predictions have the weekly storage refill pegged at around 30 Bcf with a potential range between 24 Bcf and 56 Bcf.

However, during the same week last year only 12 Bcf was injected and the highest injection for the week since AGA started its survey is 34 Bcf. Given the reaction of futures to the report recently, it is impossible to predict which direction prices will go even if the injection is extremely large or small. "The bulls are hungry right now and they'll eat anything you feed them," said one trader, who believes even a massive weekly injection will trigger a spike similar to what occurred last week when 70 Bcf was the weekly figure.

Nevertheless, working gas levels are much higher now than many observers predicted they would be. Storage in the key Eastern Consuming region is 91% full. Overall, working gas levels at 2.7 Tcf are only 7% less than the five-year average and still rising.

The relatively comfortable level of working gas in the east right now is part of the reason Northeast prices have been soft relative to the production area, said one source. "Tetco M3 has been trading 30 cents over the hub because of no weather and a decline in injection demand. TCo [Columbia Gas] is 18-20 cents over. CNG has been trading around 27 cents to the hub and New York has been trading probably about 35 cents over the hub," he said. "The increases today were purely a financial play. Until we get this cool weather next week, I think the spreads will stay relatively weak."

In contrast, it's been a pure weather play out in the Rockies and Pacific Northwest, although a low line pack OFO on El Paso in the San Juan Basin has added some support as well. "The only exception is the SoCal border," said one marketer. "They have moderate weather out there so basin prices must be driving it up. SoCal border is well above index; it's in the low $5.60s and index was $5.18. The Midcontinent and San Juan Basin are up only a dime or so above index, so I'm not sure what's driving the border.

"It's cold here in Denver," he noted. We're also still trying to buy for storage, but prices have to get down to a certain level before we can do that and it looks like it could be a long wait. We're looking at a week of pretty cold weather where it's not supposed to get out of the 40s."

There was a little bit more gas (400 MMcf/d) making its way out of Alberta Monday and Tuesday because of an ANG maintenance outage that ended. That may have put some downward pressure on prices, but cold weather continued to provide enough support to produce daily gains of more than a dime in the Pacific Northwest. "If it wasn't for the Merc [Nymex], I think Sumas would be down a lot more," said a marketer.

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