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Cash Prices Rebound But Mild Weather Sets Stage for More Storage Injections

Natural gas cash prices rebounded anywhere from a few cents to more than $1 on Wednesday after buyers came into the market to take advantage of the huge price declines earlier in the week that left the market as much as $3.00-4.60 lower than first-of-the-month indexes.

"The screen kind of ran up a little this morning and it looked like cash prices had fallen too far [on Tuesday] so that prompted some early buying, but then futures backed off a little," said a Midwest marketer. "Chicago cash came off pretty quick. The Northeast traded up earlier in the morning but then also fell sharply after that." Near-month futures ended the day down 25.6 cents to $11.604.

The net gain in New York (Transco Zone 6) and Chicago was only about 15 cents. Some Midcontinent, Rockies and other Western points, however, soared 50 cents to well over $1. Sumas jumped about $1.50 to the $8.20s, but was still down more than $2.80 from bidweek levels. Waha gained 5 cents to $6.89 but is about $4.60 below index.

With prices so far below index levels there may have been a market floor that was reached on Tuesday, said a Gulf Coast trader. "We also are about to enter the withdrawal season. Even though it's pretty mild right now everybody still knows the winter could be cold and cooler weather is just around the corner. If it gets to be January and we've had a mild November and December and shut ins have declined to a much smaller amount, I think that's when you will see this market really get hammered. But it remains to be seen whether that will happen."

The Minerals Management Service (MMS) said on Wednesday that gas production shut-ins offshore in the Gulf of Mexico fell 226.25 MMcf/d to 5,043.20 MMcf/d from levels on Tuesday. Sixty eight producers still report 210 platforms and five rigs evacuated. About 958,000 bbl/d of oil is still shut in. Cumulative gas shut-ins stand at 391.440 Bcf.

"A lot will depend on how fast the Gulf production comes back, and it has not been coming back very fast at all," noted consultant Ron Denhardt of Winchester, MA-based Strategic Energy & Economic Research. "I've heard some processing plants will be back in a couple weeks and we should get some production back. But I had assumed we would be down to only about 3 Bcf/d shut in on average in November and here we are today with more than 5 Bcf/d still shut in."

Denhardt said that's likely to keep prices up and demand depressed. "My [Henry Hub] price forecast for the winter based normal weather is $9.20, and the difference between a $9.20 and $12.50 is basically the demand response." But it is very difficult to determine how much demand will decline, he said.

"Injections have been really high even after you adjust for weather. People have enough gas in storage right now and consumption is pretty low so that's putting some pressure on prices. But it seems to me that there's still a pretty lot of room left in storage although you can't injected it now as fast as you could in July or August." Denhardt said he's predicting a weekly storage injection of 15 Bcf to 30 Bcf. The ICAP storage options auction settled at 33.5 Bcf.

"NOAA's projections through the middle of the month are for really warmer than normal temperatures for most of the eastern part of the United States. That will allow more gas to go into storage."

A Northeast utility said Wednesday that his storage is basically full and he's turning back some baseload supply that is under a flexible contract. "We're full on storage right now and the weather is mild so we are not taking some of our supply for the next few days," he said. "We'll be injecting gas into storage again tomorrow, not based on our plan but just because of the above normal weather. We leave an operational hole in storage of a couple percent because we know we will have some warmer days in November.

"I would assume a lot of other LDCs are in the same boat. With prices where they were heading into this winter, I'm sure everyone has made an effort to get their storage full. Commissions will look at that real closely."

Porter Bennett of Denver-based consulting firm Bentek Energy said the gas flow numbers on pipelines nationwide show a lot of gas in the system. "Storage is near a five-year high and that's after two months of reduced production. The logic of what you're seeing just says there is a lot of gas in the system." Bentek is expecting a weekly storage injection of 30-35 Bcf in this week's EIA storage report and a similar amount in next week's storage report given the warm weather this week. That would put working gas levels at about 3.2 Tcf to end the storage injection season. Working gas levels as of Oct. 21 stood at 3,139 Bcf compared to a five-year average of 3,054 Bcf.

Bentek said although storage is getting close to full in the eastern and western consuming regions there is still some space left in the producing region, which could show a few more weeks of net injections.

"I think prices have fallen off this week because there's just no demand," said Bennett. "It's warm everywhere except Montana and North Dakota. My guess is that by the end of this month we should start to see some bigger declines in the shut-ins too."

A Midwest marketer said Wednesday's cash increases appeared to have come from some early morning buying because prices weakened late in the session. "I think there may have been people short in some locations to start the morning, but once they were out of the market everyone started trading transport options and prices then started to come back down. It's going to be unseasonably warm until Sunday in many places, particularly the Northeast so there can't be much demand the rest of this week," he said.

Temperatures rose sharply throughout the Midsection of the U.S. on Wednesday compared to Tuesday's temperature levels. Temperatures in New England and much of the West slipped a few degrees but are still about 15 degrees above normal and are expected to get even warmer over the next couple days.

"Everybody has been long baseload gas and gas in storage with no demand and 60-70 degree temperatures across the nation," noted another marketer. "That's the reason prices fell earlier this week. But nobody wants to be short in this market. They went into the month long and sold off quite a little bit on Tuesday. But they expect prices to be strong. Buyers came back out today."

A Gulf Coast trader said he's expecting the market to weaken the rest of the week. "It does look like it is going to cool down a little in Chicago. But the Northeast is going to be fairly mild in the 60s. By next week temperatures will start cooling down again."

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