Prices Crash on Light Demand, High Storage

The complete lack of demand and flood of supply on the market late last week left many considering the possibility of a return to historical price levels, particularly in the Rockies where prices Friday dropped to near $1. The $5-$6 dollar crash in prices at the Southern California border into SoCalGas and the recent declines in western power prices were enough to prompt California Governor Gray Davis to declare the "war" on energy prices officially "won."

Davis told the San Francisco Chronicle on Thursday that the state has "finally turned the corner." However, apparently in almost the same breath he noted the state probably will face a difficult summer with the possibility of rolling blackouts. It was a little unclear how he reconciled the two.

Nevertheless the bears were clearly in control of the gas market late last week and rightly so. After a brief uptick in prices Monday and Tuesday in response to some heat in Texas and California, demand seemed to vanish with the heavy rains, including the season's first tropical storm in the Gulf, Allison. The storm did no damage to western Gulf production facilities but did cool things down quite a bit throughout the region.

About the same time the rains started washing away any cooling load, the rapidly rising gas storage situation once again captured everyone's attention. The American Gas Association reported yet another 100+ Bcf weekly injection last Wednesday. The AGA said 117 Bcf was put into storage during the week ending June 1, leaving storage about 42% full. The market had been expecting a refill of between 90 and 115 Bcf. Working gas levels at 1,398 Bcf now show a 46 Bcf surplus compared to the same time last year and are only 1 Bcf less than the five-year average.

The western price crash clearly stole the show last week. The in-state pipes were packed and there were operational flow orders on both Southern California Gas and Pacific Gas & Electric for Saturday flows. PG&E also had an OFO on for Thursday's flow. The OFOs pushed a flood of gas back into the supply basins, hammering gas prices all the way down to $1.10 at Opal, WY, on Friday.

Gas prices at the border plummeted to lows around $3.20 at Topock into SoCalGas. The previous Friday, the Southern California Border average was $9.24. PG&E-Topock prices were so low that it made no sense to ship gas from the producing basins most of the week. At times, PG&E prices were below Permian levels. Between April 1 and June 1, the average daily spread between Permian and PG&E-Topock was $4.12, but between June 1 and June 7, the average was minus 26 cents.

The PG&E Topock-San Juan (non-Bondad) spread fell from $4.60 over the past two months to plus 65 cents through June 7 this month. Even the Southern Border Average-Permian basis has declined $3.40 from the average over the past two months.

The California utilities had very little demand to serve right now because of mild temperatures and more power coming into the state from the Pacific Northwest. "There's a lot of hydro power coming out of the Northwest right now because of a fish flush," said one trader. "It's just a short-term thing. It's just that time of the season that Bonneville Power has to push water down the Columbia River and that's making more power available throughout the region."

With the sharp demand decline in California, the utilities were putting gas into storage at maximum rates. A SoCalGas spokeswoman said injections reached 900 MMcf/d last week, and SoCal's storage levels were about 50% full or near the five-year average. "We expect to meet or exceed historically full levels by the winter," she added.

"Prices were pretty ugly here today," said a Rockies marketer on Friday. "Demand is just not there now. But I've got news for the California governor, the energy price spikes may be over right now but the energy crisis is not. This is June. We still have July, August and September left. I don't know if this is the eye of the hurricane, but there will be some buying left before this storm is officially over."

Others, however, pointed out that if and when the heat and hurricanes hit, customers will be able to weather it better with a much more comfortable amount tucked into storage than they had last year. "They won't be as likely to push the panic button and bid outlandish prices," said one analyst, who labeled himself "guardedly optimistic," that the market will behave this year.

One Midwest energy manager is convinced that now is the time to lock in fixed prices for the summer and next winter. "I've had a few producers calling, asking me to do some term business. I'm seeing a lot of sellers out there trying to do stuff for the summer. I think we're getting near the bottom. I think it's a good time to buy either some fixed-price strips or some index strips right now.

"At these prices, you have California basis coming off; basis everywhere is about as cheap as it's going to get," he said. "And we haven't had the heat yet. It's a good time to lock in basis and get long."

He claimed some producers were even considering shutting in production to do maintenance at these prices. "Much like the electric generators who have put off maintenance, the producers have wells and equipment that need to be worked over, and now is about as good a time as any --- like the electric plants that ran so long and so hard without any maintenance. At $10 you're damn right you aren't going to shut that wellhead, but at $3, yeah, you'll shut in for a few days."

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