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Next-Day, February Bidweek Values Higher on Cold, Reduced Storage; Futures Inch Lower

Continuing on the path established late last week, the March natural gas futures contract probed lower Monday, recording a low of $4.751 before closing the day's regular session at $4.905, down 3.8 cents from Friday's finish.

Physical prices Monday moved in the opposite direction, with most points tacking on anywhere from a few pennies to just over $1. But the real news occurred in February bidweek action, where January's arctic chill resulted in record monthly prices at a few locations in the Northeast.

The Northeast and Midwest finally took back seats in the news department Monday as the largest gains for gas to be delivered Tuesday were predominantly at California locations with temperatures running in the low 40s to mid 60s. Next-day gas at PG&E Citygate added $1.06 to average $6.31, while SoCal Border and SoCal Citygate tacked on $1.01 and 89 cents respectively to average $6.15 and $6.19.

The Midwest also mostly saw bumps of more than 50 cents. Consumers Energy added 86 cents to average $7.98, and Michigan Consolidated increased 60 cents to average $7.46. Chicago Citygate sat out on the round of exuberance, falling 5 cents to average $6.91.

Meanwhile, market watchers took Monday to catch their breath following the frenzy of futures market price swings late last week. While noting that futures are off to a "soft start" this week, Jim Ritterbusch of Ritterbusch and Associates said he still expects the recently returned volatility to make another appearance this week.

"We look for heightened price volatility to provide a further feature to this week’s trade as some temperature moderation next week butts heads with additional expansion in the supply deficit through a couple more EIA reports," he said Monday. "Although our combined draw for the last two weeks in January will likely prove smaller than we previously expected, a 500 Bcf cut across two EIA reports would still prove substantial with end-of-January supply dropping toward 1.9 Tcf."

Ritterbusch said this would be well below last year’s approximate end of January storage of about 2.7 Bcf and the five-year average of just below 2.5 Tcf.

"The magnitude of this shortfall should prove to be a limiter to sustainable price declines, even allowing for a brief return to normal or slightly above normal temperatures,” he said. “And while some warming will be inevitable, the low supply level will be sensitizing the market to even the slightest hint of another polar event sinking into the upper Midcontinent and possibly drifting eastward."

The analyst allowed that his expected trading range of $4.65-5.48 "may appear excessively wide," but he noted that the expiration of the February contract last Wednesday travelled an 82-cent range in a single session. "We will continue to emphasize that the 'good old days' of extreme volatility are back for a while and that price swings of as much as 70-80 cents both this week and next are possible until the weather factor begins to diminish later this month when EOS supply is relatively defined and, hence, discounted."

Traders and market watchers were abuzz Monday in anticipation of the release of February bidweek. January's arctic blasts and promises of more cold to come boosted NGI's National Spot Gas Bidweek average by $2.04 to $6.58, with some northeastern points logging record highs.

Volumes traded were low, but February bidweek at Algonquin Citygates vaulted $13.71 to $35.50, easily eclipsing the point's previous bidweek average record high of $21.79 set last month. Transco Zone 5 was seen at $15.53, up $9.95, beating the points previous record high of $15.11 set in October 2005, and Transco Zone 6 non-NY added $9.69 to $15.59, besting its previous record of $15.42 notched during January 2001 bidweek. Regionally, the Northeast posted the greatest gains, up $4.08 to an average $8.83.

"The issue that is always talked about is whether there is going to be enough supply to meet demand. Everyone got a little comfortable once the domestic shale plays ramped up, and I think everyone got comfortable, believing there is so much supply that people were choking on it," said a industrial end-user. "What is happening now is the bottleneck is the infrastructure -- getting the gas from point A to point B. All the gas in the world at the wellhead doesn't help you if you have someone running a power plant. With more gas-fired plants coming on, this is something to be aware of. They are going to run as hard as they can at $200/kWh costs, so $135 gas works."

While record bidweek values were recorded at some Northeast locations, the end-user told NGI he doesn't believe people will renege on their 30-day agreements, whether they are indexed or were the result of bilateral trades.

"Most of these are going to be driven by their contracts, so if you are set up on the first of the month index price, you're going to have to eat it," he said. "Back in the days when Katrina made prices go a bit crazy, you had to man up and take it because that is what you signed up for. If folks try to renege on these contracts, if you're the supplier you are going to call that a breach. The supplier is having to eat some of these same costs, too. It is what it is for various reasons. You either abide by your contract, or I think someone is going to have legal discussions later.

"I've got a number of first-of-the-month index contracts, and some months you do well, some months you don't. If you go back to Katrina, I had a couple of months where the index price even worked out a lot better than the day prices."

Fuel-switching isn't much of an option, he said. "Let me put things into perspective. I just paid $5 for propane, which equates to $54/MMBtu. Does that sound fair? It isn't just natural gas. All of the other fuels went nuts as well."

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