Winter Weather, Soaring Futures, Drag Cash Higher

Despite a high weekly storage injection of 36 Bcf last week compared to a five year average build of only 13 Bcf, according to the American Gas Association (AGA)'s weekly report yesterday, the futures market soared much higher and yanked cash prices up with it. Most daily cash price gains ranged from 20 cents to 35 cents.

Cash and futures prices found convincing support in the widespread cold temperatures sweeping the western two-thirds of the nation. A new upper-level storm will continue pounding rain and snow over a widespread area in the West today. Winter weather warnings, watches and advisories were widespread in the Rockies and Pacific Northwest on Wednesday. A cold rain mixed with snow also was starting to chill the Midwest and will continue producing some heating demand across the Midwest and Great Lakes regions today.

The Pacific Northwest saw the most dramatic changes in prices on Wednesday with Sumas, Stanfield and Kingsgate jumping 40-50 cents or more. The West is facing not only cold weather, snow, sleet and rain, but also a host of pipeline operational issues, most importantly a potential OFO on Northwest. In addition, there was an unauthorized overpull penalty situation on El Paso and various maintenance programs on Transwestern and Kern River (see Transportation Notes).

Northwest still was considering an OFO yesterday because nomination requests were expected to continue to exceed northern flow through the Kemmerer compressor station. The constraint there has raised demand for gas at Sumas, Stanfield and other points in the Pacific Northwest. Tight operations also continued on Kern River with continued maintenance at the Muddy Creek compressor station.

Meanwhile, the cold temperatures and snow seemed to shock a few folks in the Southwest, in Texas and in the Midcontinent where buyers were flushed out of their hiding places. Prices soared 20-40 cents at many locations.

"There's a lot of demand in the east of California markets. It is uncharacteristically cold in Arizona today," said an end-user. "Our high is 15-20 degrees lower than normal. I assume the same type of thing is going on in California but there's some folks that have storage out there, and the price is right to bring gas back from the border."

There was strong buying in West Texas Wednesday by in-state peakers and by players who were moving gas west rather than buying outright at the California border. West Texas prices gained about 30 cents while prices at the border shot up by about 35 cents or more in some instances.

"Usually, you just see this at Keystone, but [Wednesday] you saw buyers picking up big volumes at Waha as well," said one observer. "Waha, while typically a more expensive option, can be a better source for gas flowing west because it is not constrained at Pecos, like Keystone supply."

There was an abundance of "first-of-month shorts at the Cal border," he added. "Buyers came into the month thinking that prices would continue to tumble lower and their patience would be rewarded. Now the weather is cold and they are forced to pay up."

What's making matters even worse is El Paso's extended unauthorized overpull penalty situation in the San Juan Basin because of people shorting the pipe, hoping for lower prices later in the month. "We had real problems trying to get any gas past cycle two into El Paso's system," said the end-user. "Every point in the east seems to be full so we actually flowed some stuff from California back. That overpull penalty situation is pretty messy. Prices there [in the San Juan Basin] got up into the $4.80s."

Chicago and Midcontinent prices gained significant strength yesterday and made gains relative to the Henry Hub. "Chicago was about 10 to 15 cents over the hub which was more than a couple cents stronger than it has been," said one source. "It's cooler and there probably still is storage injection demand up there with the screen running like it is. Being able to buy gas 10 cents under means there's still some profit to be had if you can recycle your storage. We don't see any real severe weather up there yet. But it should be there later in the week." Chicago added about 20 cents, while many Midcontinent points added 30 cents or more.

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