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Cash Drops Sharply; Predictions Show Warm 2nd Half of December

It's hard to deny that market fundamentals are looking pretty bearish for the last half of December. Cash prices tumbled about 30-85 cents on Monday from weekend levels, depending on the location, except for a few unusual cases in the already-depressed Rockies where Questar posted a small gain.

Several factors are poised to put continued downward pressure on the market: the current mild weather across most of the country; expectations for above-normal temperatures over the eastern two-thirds of the nation through the rest of December; and the likelihood of several weeks of bearish storage data comparisons.

Prices in the Northeast took it on the chin Monday with declines of 60-85 cents. Transco Zone 6 New York slid the furthest (86 cents), averaging in the mid $7.30s. Spreads to current Henry Hub cash have plummeted more than 50 cents over the last two trading sessions, with Transco Zone 6 New York ending the session Monday at about plus 55 cents compared to plus 77 cents on Friday and plus-$1.04 last Thursday.

Gas flows into New York on Transco were down nearly 20% Monday and are likely to show continuing weakness. Flows are down about 7% month-to-date to 1.7 Bcf/d compared to flows during the same period in 2005, according to Denver-based Bentek Energy. Niagara flows, meanwhile, were down 20% Monday to 724 MMcf/d and are down about 20% month-to-date compared to levels during the same period last year.

"Cash prices should continue to weigh like an anchor," said a Northeast marketer. "I just think it's going to continue to be difficult for futures to rally to any great degree with cash looking like it's going to literally weigh like a millstone around its neck.

"We will start coming into resid parity here if we aren't there already," he noted. "Depending on who you talk to and where they are, you'll get different stories on that, but we are already under it in some cases, so that will come into play. But I don't really see how futures can rally with Northeast cash at 40 cents over the hub when it was $1.20 over at the first of the month. Let's face it, it's 50 degrees tomorrow and it's 50 degrees for the next two weeks. I just don't see the catalyst for any kind of run on the bank."

The latest six- to 10-day forecast from the National Weather Service shows an extremely likelihood of above normal temperatures for the eastern two-thirds of the nation. Below-normal temperatures are expected in California and the Pacific Northwest Coast with Normal temperatures expected over most of the Rockies and Pacific Northwest.

Gulf Coast, Midcontinent and Midwest points were down sharply Monday, with Henry Hub off more than 60 cents to about $6.80, Transco Station 65 off nearly 75 cents to about $6.85, Panhandle Eastern down more than 50 cents to about $6.05, Chicago down 57 cents to $6.70 and MichCon off 52 cents to $6.92.

Chicago gas flows were down 23% Monday, which had one seller worried that Nicor would begin restricting citygate access.

"I do expect prices to get weaker throughout the week because of above normal temperatures," the marketer said. "I'm concerned about capacity because Nicor could shut down some meters like they did a couple weeks ago. They are not doing it for tomorrow, but if it stays above normal I think they may, and that would really whack Chicago prices. I'm long supply and that would make me go to Nipsco or Peoples, which would be trading at a major discount."

He said Midcontinent and Midwest points opened at their daily lows Monday and came up a bit. "It certainly ended down from the weekend, sure. But I was kind of surprised how resilient some spreads were," He noted that Panhandle ended at about minus 71 cents compared to Henry Hub cash. That was down from about minus 84 cents Friday for the weekend. MichCon spreads climbed to more than 10 cents over the hub from being only about 1 cent over on Friday.

"Prices looked like they bounced off some early lows. But I had utilities telling me they were not buying, and some were even injecting gas on Sunday," the marketer said.

Western points outside the Rockies Monday showed similar weakness to the rest of the market. The already-depressed Rockies posted a few small increases, including at CIG, which was up a few cents, and at Questar, which gained more than a nickle to the low $4.60s.

Meanwhile, gas storage data over the next three weeks could add to the downward market pressure because the storage surplus compared to levels last year should grow sharply. During December 2005, working gas levels fell an average of about 131 Bcf/week because of a severe cold snap. Last week's storage report for the week ending Dec. 1 showed working gas levels down only 11 Bcf to 3,406 Bcf, which was 232 Bcf more than levels at the same time last year.

In a report issued to clients on Monday, analysts at Raymond James & Associates said they believe the storage surplus compared to levels last year could grow "by another 100-200 Bcf over the next three weeks. Given the extremely tough upcoming three-week weather comparisons from last year, we should see the year-over-year gas storage surplus grow, possibly putting downward pressure on both natural gas [prices]," the analysts said.

However, they also said any sharp drop in prices due to the storage situation should be treated as a "buying opportunity going into January... We believe that a more constructive view will reappear in January as the weather [comparisons] turn extremely bullish, with gas migrating back to our [2007] forecast of $10/Mcf." The analysts noted that last January was much warmer than normal. Last winter's weather was about 9% warmer than normal despite starting out colder than normal.

"When you isolate out the weeks of Dec. 8-22, 2005 weather for those weeks was over 18% colder than normal. This cold weather drove a total of 512 Bcf of withdrawals (about 130 Bcf more than normal) in that three-week period alone! On the other hand, the next eight weeks were 24% warmer vs. normal and gas demand was reduced by about 500 Bcf relative to what normal weather would have driven." If weather is normal this coming January, it should lead to a "bullish reversal," the analysts said.

"We are looking for the year-over-year gas storage differential to go from a 350 Bcf surplus in late December to more than a 300 Bcf deficit by the end of February."

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