Cash prices were up across the board Monday but posted small gains of generally less than a dime in the Gulf Coast and Midcontinent producing areas with larger increases in the market areas. Western locations posted gains of about 10-12 cents on average.

Dracut, MA, Iroquois Zone 2 and Tennessee Zone 6 were among the biggest daily gainers with increases of more than 20 cents compared to weekend levels. Dracut was approaching $6.60 while Iroquois and Tennessee were near the mid $6.70s. Transco Zone 6 New York was near $6.70 up about 20 cents. In the West, prices were up 5-15 cents with Southern California Border prices near $6.40 and Opal, WY, trading around $6.13.

Most traders said Monday’s gains were a normal response to a demand resumption following a weekend with mild temperatures in many major market areas. Many said they expect a relatively quiet week with a continuation of higher-than-normal temperatures over the bulk of the nation.

“We had a little bit of a basis squeeze in the Northeast over the weekend and it came back out today,” said a Northeast marketer. “Basis was about 55-65 cents in New York at Zone 6 compared to 40 cents Friday for the weekend. But we’re not looking for any drastic weather changes.

“On some of these warmer days, it’s been better to turn storage off, hedge it forward and buy in at these cash prices. It’s a day to day thing, but it looks like it could be that way this week. There are no bullish signs on the weather frontier. Today the market just came back to where it should be after a mild weekend.”

A Canadian producer said trading was very quiet at Chicago Monday and should remain so most of the week. Chicago prices moved up about a nickel. “Cash came up from weekend levels but weakened a little bit in the forwards,” he said. “It’s supposed to be mild all week in Chicago, but it should get cold next weekend.

“I think cash probably will weaken a little bit more on the basis. But if we get any sort of cold-weather forecast saying it will turn reasonably cold in the Northeast and Midwest, there are a lot of people short in this market so it would be interesting to see what happens. These are still pretty high prices, but we’ve also come off quite a bit already.”

The National Weather Service’s six- to 10-day forecast still has the country split with below normal temperatures expected over most of the East, excluding New England, and above normal temperatures over the West, excluding a sliver of normal temperatures down the middle of the country and across Texas. The eight- to 14-day temperature forecast pushes the area of below normal temperatures down into the Southeast, Gulf Coast and South Texas, with above normal temperatures spread out over a broader area of the country that includes the Midwest, parts of the Northeast and entire West.

“The weather reports remain generally bearish as the jet stream pattern does not look conducive to deliver cold air south,” noted Kyle Cooper of Citigroup.

“There’s still a big West-East divide with warmth expected in the West and cold in the East, but right now it’s pretty mild everywhere except where I’m sitting right now here in Calgary at minus 4 Fahrenheit,” the Calgary producer said. “It’s pretty darn cold up here.”

He said the rest of December at Chicago currently is trading at a basis of minus 35 off the January futures contract. During bidweek, the December-January spread at Chicago was running at more than minus $1, so basis has come in quite a lot since then, but it is showing signs of weakness. “It will be interesting to see if we can hold that minus 35 cents,” the producer said. “Henry is actually not doing as well; the rest of the month is about 50 under. Chicago definitely has the transport covered for January right now.”

Last week’s wild futures market ride, triggered by an erroneous storage number and a revision, wreaked havoc on the market and may continue to have a negative impact on prices. Early predictions for this week’s withdrawal are coming in lower than historical averages. Thomas Driscoll at Lehman Brothers is predicting an 80 Bcf withdrawal compared to a 111 Bcf withdrawal during the same week last year. Cooper at Citigroup is expecting a withdrawal “probably in the low to mid 80 Bcf range.”

Consultant Stephen Smith of Stephen Smith & Associates said he’s predicting a 91 Bcf draw. “This projected draw compares with a normal seasonal draw of 93 Bcf (based on 1994-2003 norms),” he said. He said the withdrawal would have been about 5 Bcf smaller if 600 MMcf/d of gas production was not off line because of damage from Hurricane Ivan.

“Temperature differences from normal [last week] were minimal. Heating degree days were 1 HHD (1%) above normal (161 vs. 160). Cooling degree days were fractionally below normal… Weekly Northwest hydro generation was 11.1% above year ago levels, ” Smith said. “Weekly nuclear availability was 1.6% above year ago levels.”

In his note to clients, Smith noted that the current storage surplus is more than half of the 750 Bcf surplus seen in spring of 2002 when Henry Hub prices plummeted to $2. “This may help explain why January and February futures declined by $1.84 last week.

“If normally cold early December weather should make no dent in the [storage] surplus (as we expect), then a very heavy burden us being assigned to January/February.” He said December-February weather would have to average 10% colder than normal for the storage surplus to reach zero by the end of February. “There have been only two winters that exceeded being 10% colder than NWS norms in the last 13 years…”

As a result, Smith believes the January futures contract “still looks about $0.75/MMBtu too strong… If December and January HDDs should turn out to be milder than normal, then a February bidweek prices of $4.50 would not be out of the question.”

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