Producers See Happy New Year in Price Spikes
After beginning 2004 with unusually mild weather in the East, the cash market turned around rapidly Monday as the Midwest joined most of the West in experiencing winter storms, with the Northeast poised to take its turn Tuesday. Prices responded to the anticipated cold snap with across-the-board run-ups of about 60 cents or greater.
Northeast points led the way with dollar-plus gains, and the Algonquin citygate topped out at more than $8. According to The Weather Channel, the arctic air mass moving in Tuesday will be followed by "even colder weather Wednesday and Thursday" as lake-effect snows begin to build up.
He hadn't been expecting such big jumps, a producer said, "but it looks like prices wished producers a Happy New Year."
This week's onslaught of frigid conditions is resulting in several OFO-like constraints or cautionary notes about such a possibility (see Transportation Notes). Northern Natural Gas provided one indicator of how radically the weather demand picture has changed by declaring a System Overrun Limitation. On Thursday and Friday of last week (and also during the two days after Christmas) the pipeline had a System Underrun Limitation in effect because of forecasts of above normal temperatures in its market area.
A Midwest utility buyer who quoted Northern Natural Gas-Ventura at about a 35-cent premium to his demarcation point purchase (the two usually trade fairly close together) said it was mostly a result of the blizzard that hit Chicago and other parts of the region over the weekend. Big gas demand in Chicago tends to drive up Ventura more "because you've got to pay a little extra to make it worth a supplier's while" to send Ventura gas on to Chicago instead of to NNG's market area. Commenting on the pipeline's SOL implementation, he said the OFO-like restrictions are less common in early winter when storage is still nearly full, "but they won't require as much cold weather" as the season wears on and storage starts nearing depletion.
Blizzards and other harsh winter weather may have been newcomers to the Midwest scene, but for much of the West it was merely a continuation of the "same old, same old" that the region has endured much more often than the East so far in the 2003-04 heating season. California, the Rockies and Southwest basins tended to see most of Monday's smaller upticks of less than 70 cents.
Prices tended to rise modestly in later deals, but a Gulf Coast marketer said cash numbers were in what he called a "double-hump trend;" that is, up-down-up-down. Asked how long he thought prices might continue to soar, he replied, "You never know," but a good guess would be when the frigid weather up North starts to fizzle out. Besides the weather-driven support behind Monday's gains, the marketer noted that industrial end-users that had been idle through the year-end holidays also contributed to increasing load as they resumed operations.
Citigroup analyst Kyle Cooper had some divergent thoughts about the return of industrials to the spot gas market, however. Noting the "shockingly low" weekly storage withdrawal of 80 Bcf reported last Wednesday, Cooper said, "A secondary effect [after the holiday-induced load slump], which we did not believe would become apparent until January, would be fuel switching...[N]atural gas is considered extremely overvalued in relation to crude and this could have also played a role in this low draw. However, we did not expect that to become more obvious until January." Cooper's estimation for the upcoming storage report is for a withdrawal of 56-66 Bcf. This would compare with year-ago and five-year average volumes of 86 Bcf and 148 Bcf respectively.
The Florida peninsula was about the only place in the U.S. Lower 48 that still had forecasted highs exceeding 70 degrees Monday, but that appears about to change as a cold front completes a sweep eastward. A producer who did Florida Gas Zone 1 deals on either side of $6.20 in the regular trading session said he was also to make another sale there in the mid $6.50s after the nominations deadline; he had made sure with the pipeline beforehand that it could accept his package for full-day flow Tuesday. An end-user who usually always finishes trading before 9 a.m. CST called for the post-deadline supply, the producer said, and his willingness to pay a hefty premium indicated that would be joining the rest of the nation in shivering Tuesday.
The producer added this observation: "It's been a slow start to winter in our neck of the woods [Texas], so I guess I better sell that gas while I've got the chance."