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Withdrawal Comes in Below Estimates; March Tumbles 13.7 Cents

The Energy Information Administration (EIA) reported a "measly" 186 Bcf storage withdrawal for the week ending Jan. 26, stunning many market prognosticators who were looking for a draw closer to, or even greater than, 200 Bcf. The March futures contract immediately plummeted more than 20 cents in reaction to the news to $7.435 as of 10:54 a.m. EST. March ended the day down 13.7 cents at $7.530.

"If ICAP was looking for 215 Bcf, the number was definitely below expectations," said Tom Saal of Commercial Brokerage. "The market moved up so fast and high this week -- the low for the week was $6.82 -- that we've only retraced about 50% of the move from Tuesday. We have to keep things in proper perspective. It could retrace a little bit more, but the cold weather is still here. I don't think this thing is going to fall apart. Next week's withdrawal should be even bigger than this week's, so we are definitely putting a dent in the surplus."

The EIA said working gas levels on Jan. 26 totaled 2,571 Bcf, which was about 152 Bcf more than the same time last year and 454 Bcf more than the five-year average of 2,117 Bcf. The 186 Bcf withdrawal compared to an 87 Bcf withdrawal during the same week last year. Working gas levels in the East fell 120 Bcf to 1,465 Bcf. In the Producing region storage dropped 45 Bcf to 807 Bcf, and in the West working gas fell 21 Bcf to 299 Bcf.

Sharp declines in storage volumes at major fields in the East and Midwest and reductions in gas flows out of the Gulf Coast region last week led Denver-based consulting firm Bentek Energy to predict a 207 Bcf withdrawal for the week. In a special market alert released Wednesday evening, the consulting firm highlighted the significant increase in gas demand in the South, Midcontinent and lower Midwest.

Gas storage withdrawals at fields operated by Dominion and Columbia Gas, the two largest gas storage companies in the East, soared last week to 24 Bcf and 22.9 Bcf, respectively, according to Bentek's Weekly Storage Outlook. "These huge withdrawals, combined with large numbers from NGPL, [Northern Natural] and ANR contribute to a total Bentek Eastern Region Sample withdrawal of 88.1 Bcf, ...the largest number we have seen for any regional total in our Weekly Storage Outlook" since it was first published in August 2005.

"While the magnitude of these withdrawals and other large withdrawals in the Producing and West Regions were surprising, the gas flow numbers from our Energy Data Warehouse revealed another important development: the large volume of gas being consumed in Oklahoma, Texas and the Lower Midwest, and Gulf."

Bentek reported that flows into Columbia Gas at Leach, KY, from sister pipeline Columbia Gulf have averaged about 818 MMcf/d since Jan. 13, down 50% from flows in January 2006. That illustrated the significant demand seen in the South, Gulf Coast and Midcontinent. Regional pricing also was "in sync" with these demand trends. Price spreads between Leach and the Henry Hub collapsed from an average of 21 cents Jan. 1-17 to 2 cents on Jan. 17. "Clearly, prices are telling the market to keep Gulf gas south of Leach," Bentek said.

While pipeline maintenance was partly responsible for the declines in flows north, strong demand throughout the Gulf Coast and Midcontinent regions was the major contributor. Heating degree days in Amarillo, Houston, Dallas, Baton Rouge, Lubbock, Oklahoma City, Shreveport, Omaha and Tulsa were at least 68% higher last week than during the same week in 2006 and 25% higher than the eight-year average. Gas consumption by power generators in the Southeast Electric Reliability Council, Southwest Power Pool and the Western Electric Coordinating Council was up sharply, according to Bentek's data. Total January consumption from plants in those regions is up by about 46%, or 2.3 Bcf/d, from levels in January 2006.

However, comparisons to the same month last year can be misleading. January 2006 was significantly warmer than normal. Strong gas demand also has been rare in recent weeks and when it finally does show up, it can be surprising. Next week is expected to be even colder. Early predictions indicate a 200+ Bcf withdrawal, but that may be reconsidered in light of the surprising storage number this week.

"I was definitely mildly surprised," said enerjay LLC broker Jay Levine. "How storage inventories are calculated remains a mystery to me. My impression is there is probably room for error. It was lower than a lot of people thought it was going to be. I have a feeling that next week's report will somehow make up for this week's. I'm expecting over 200 Bcf in the next report and that compares to something like a 46 Bcf during the same week last year."

The futures market reaction wasn't more negative because "cold deadens the mind a little bit," said Levine. He noted that because the most severe cold of the winter is still on the way it's hard for the market to go down much further.

"The market may have a short-term top in it, but I think the tone has changed in that this week's storage number still compares favorably with last year's" and that trend should continue.

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