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Continued Cold Prompts Cash Increases; EIA Reports 224 Bcf Withdrawal

Continued below-normal temperatures across the Northeast and Midwest, rising futures prices and a rapidly declining storage surplus prompted most of the cash market to move 5-40 cents higher Thursday and to make positive spread gains compared to Henry Hub.

Iroquois Zone 2 posted the biggest daily cash price increase on Thursday, rising more than $1.15 from Wednesday and reaching more than $3.80 over Henry Hub cash. Transco Zone 6 New York rose about 90 cents to more than $12.25, about $4.20 over Henry, compared to a $3.47 spread to the hub a day earlier. Increases at other points in the Northeast and in other regions were much smaller. Rockies prices gained 5-40 cents on colder temperatures and made some slight progress compared to the Henry Hub in Louisiana, which ended the day at $8.06, up about 17 cents.

The 224 Bcf storage withdrawal last week, reported by the Energy Information Administration (EIA) Thursday morning, sent storage below levels at the same time last year, potentially setting the stage for a more balanced market going forward.

The EIA's storage report triggered some futures buying and left some market analysts predicting next week's number could approach the 260 Bcf weekly withdrawal record set in January 1997. Storage levels are falling rapidly, diminishing the current surplus compared to the five-year average. The EIA reported that working gas as of Feb. 2 totaled 2,347 Bcf, or 26 Bcf less than levels last year. Working gas remains 378 Bcf above the five-year average of 1,969 Bcf. However, storage levels have now moved under the five-year high set last year and are very likely to fall deeper into the five-year range over the next few weeks.

"We estimate the weather adjusted [supply-demand] balance tightened by 1.5 Bcf/d last week and was 3 Bcf/d tighter than the five-year average," said UBS Investment Research analyst William A. Featherston. "We expect EIA to report a 255-265 Bcf withdrawal next week, lowering the surplus [to] the five-year average to 245 Bcf while increasing the deficit versus last year to 179 Bcf. We now forecast storage exits the withdrawal season at 1.45 Tcf on [March 31], 220 Bcf above normal." Featherston called that amount of excess gas "manageable."

In order for working gas levels to reach the five-year average of 1,232 Bcf on March 30, working gas would have to fall 139.4 Bcf/week. The five-year average of withdrawals over the eight-week period between Feb. 2 and March 30 is about 92 Bcf/week.

The combination of contractual withdrawal requirements in January and the late January/early February cold snap and have put working gas back near the normal range. Columbia Gas spokesman Kelly Merritt said last year, because of the extremely warm January and the impact of the hurricanes, customers were given more flexibility to exit January over their contractual storage requirements. But this year the pipeline has required customers meet to the storage "ratchet" provisions in their contracts.

"Our tariff requires storage customers to pull down storage by a certain amount by Jan. 31. On that day, they have to be utilizing only 65% of their maximum storage quantity so they have to have 35% removed from storage," said Merritt, noting the ratchet requirements are necessary to avoid potentially damaging the field or risking gas migration out of the field.

"Gas flows from the Gulf were down last month because our storage customers were removing so much from storage," he said. "The first two months of this winter were warmer than normal so they were playing catch-up. Starting Feb. 1 there was no requirement that they take a certain amount out of storage, so they started flowing more gas up from the Gulf through Columbia Gulf" to Leach, KY where it interconnects with Columbia Gas Transmission. He said storage levels are now more in line with what would be considered normal levels for this time of year on Columbia, one nation's largest storage operators.

The cold weather and storage withdrawals have forced more utilities and end-users back out into the spot market to buy gas this week, said a Northeast utility buyer. "We have been out buying today. We had been ahead on storage, but with the cold weather we're now basically on track, and that has required us to enter the market and buy a little bit day to day.

"Prices were up a little today. We bought Niagara gas at about $8.45, up about a nickel from yesterday. The mean temperature here today is about 16 degrees. Tomorrow it goes to 18 and basically stays around those levels into next week. The normal for this time of year is 24 degrees so were about 6-8 degrees below normal." He noted a laundry list of transportation restrictions on Tennessee Gas Pipeline.

Southern Natural Gas called an operational flow order for short imbalances across its entire system for Friday. Shippers with deliveries within 2% of receipts into the Southern Natural system, including receipts from storage, will avoid penalties, but shippers that are 2-5% out of balance will be charged $1/Dth. Shippers 5-8% out of balance will be charged $5/Dth, and shippers more than 8% out of balance will be charged $15/Dth. The pipeline also warned shippers to expect the OFO to continue through Saturday.

Meanwhile, the cold weather east of the Rockies is likely to remain cold for some time. The latest six- to 10-day temperature forecast from the National Weather Service includes no indications of above normal temperatures for the entire Lower 48 states. The country east of the Rockies is expected to be below normal, including a large area from New York City to Kansas and from the Great Lakes to Tennessee where there is a 70% chance of below-normal temperatures. Although the changes diminish in the eight- to 14-day outlook, the area of expected below-normal temperatures remains basically the same through Feb. 22.

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