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Reality of Weak Fundamentals Pulls Prices Down

Although weather fundamentals were growing a bit more supportive of cash gas going into the weekend, prices still fell at all points Friday following seemingly unlikely strength earlier in the week when moderate conditions were more widespread. Overall heating demand that was still on the mild side for the most part and the usual drop of industrial load during a weekend combined to halt the upward price trends that had run through Thursday.

The West, which had tended to see the largest midweek gains, swung to the other side in recording most of Friday's biggest losses, which ranged from a couple of pennies to about a quarter.

Traders who had been scratching their heads in puzzlement over rising prices that didn't jibe with the lack of weather-based demand may have felt relieved that the weekend market felt more closely attuned to reality.

There's a fairly decent chance of a rebound this week as cold fronts will be moving into the South, Midwest and Northeast from Sunday through Wednesday, bringing more of a touch of genuine winter to areas that had been reveling in springlike conditions in recent weeks. A series of storms would be sweeping through the Pacific Northwest that could bring temperatures in the Rockies and western Plains to 30 degrees below normal by midweek, The Weather Channel said.

However, the Northeast was in for a few more days of mild weather before starting to chill. With a New York City high of 70 forecast for Saturday, Transco's Zone 6-NYC pool saw one of the East's biggest drops of nearly a quarter.

The Energy Information Administration fell a bit short of consensus expectations in the low to mid 50s Bcf when it reported a storage withdrawal of 47 Bcf for the week ending Dec. 29. Futures traders apparently had already factored a slightly bearish report into their trading psychology, as the February natural gas contract meandered slightly up or down from flat following the report before closing out 2.2 cents higher Friday (for the second week in a row, EIA released its report a day later than usual due to the holiday weekend).

Prices were "not that much softer" Friday, a Calgary-based producer said, but it appeared that the market was starting to pay attention to weak fundamentals again. He noted that a below-freezing low was due in Chicago Saturday, but said it sparked only a small increase in demand. Transport spreads to Chicago were unfavorable from virtually all directions -- Western Canada, Midcontinent and Gulf Coast, he said. The producer added that significantly cold temperatures might get as far east as the Plains states this week, but he didn't expect the Midwest market to get especially cold.

A Midcontinent producer said he was doing only a few deals recently because it seemed like more people were taking gas out of storage instead of buying new production. A lot of those pulls are mandatory, he noted. It's mainly the private storage operators and intrastate pipes that allow customers to leave gas in place if desired, he said, while the interstate pipes and LDCs mostly have mandatory withdrawal ratchets.

There's not that many days left in the heating season, and February is a short month, the producer continued. "If we don't see something [increased heating load] by mid-January, then this market could easily tank, he said. However, for the time being he was seeing some heating load returning as Midcontinent lows were forecast to be around freezing or below over the weekend.

While not making a New Year's resolution, the producer did predict that market "volatility will be huge" during 2007.

A Rockies-area marketer said current daily prices are tracking well below where his company expects February numbers prices to be. "February is looking pretty strong" at this point, he said.

It's getting colder again in the West, he said, and as a result regional basis to the screen is getting tighter, especially in the Pacific Northwest. He reported having "seven inches of snow around our office" Friday. He noted that a steep descent by crude oil futures last week should start having more impact on gas markets soon.

The marketer said weekend spreads on TransCanada Gas Transmission-Northwest from Kingsgate to Malin were not covering variable costs of transport.

The number of drilling rigs searching for gas in the U.S. during the week ending Jan. 5 dropped by 14 to 1,411, according to the Baker Hughes Rotary Rig Count (http://intelligencepress.com/features/bakerhughes/). That was down 2% from the week ending Dec. 8, 2006 but 16% higher than the year-earlier level, Baker Hughes said. However, the tally for gas-seeking rigs in the Gulf of Mexico was up one to 81; only one Gulf rig is prospecting for oil, the company said.

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