Market observers watched in disbelief yesterday as prices atsome locations rocketed up more than $1 from Wednesday’s levels.Most cash points made daily gains of between 40 and 50 cents, anddaily price ranges were enormous.

“I don’t understand this market,” one producer confessed. “Idon’t think it’s real. I think there’s some manipulation involved;prices are just way too high. There is an improper balance, andit’s not sustainable, and it’s not realistic. It’s just not healthyfor the industry.

“The speculator controls a lot right now,” he added. “If we killthe baseload demand, when the weather comes down the prices willplunge. It’s [going to be] a nasty pendulum swing. I’ve been sayingthat November and December will be strong until the winter weatherforecasts can come out, but then January, February and March willcalm down. Lots of games are being played with the storage.”

However, that pendulum may not swing back for quite a while. Thewinter weather apparently caught buyers off guard this week. Snowthis early surprised a lot of people in Texas. Utilities all overthe country apparently went into the month expecting warm weatherand falling aftermarket prices, said one source. Now the NationalWeather Service is predicting below normal temperatures for nearlythe entire country for the next two weeks.

“One of the keys to this run-up is that the utilitiesconsciously went into November buying baseload for above normaltemperatures, basically making the bet that when and if belownormal temperatures got here they would just go ahead and hit thespot market. It’s not a surprise that they are out buying rightnow, and boy are they. They were sort of stupid, too, because the$4.50 index at the Henry Hub this month was one of the lowestindexes that we’ve had in the last few months. If you think it’sgoing to go further south as we get winter weather, I think youdeserve everything you get.”

They certainly were getting it out West yesterday. Prices inCalifornia were alarmingly strong with daily highs at the SouthernCalifornia border more than $1.35 over the previous day’s averages.

“There are a lot of buyers out here, and sellers are justwalking the price up. Prices kind of hit a wall when they got wayover next month’s levels,” said one marketer. “There’s a lot of gasgoing up to Northern California, and Southern California is juststaying strong. People also are bringing gas back from Californiato Arizona and New Mexico. It’s cold and the economy is booming.Power demand is strong and power prices are high. A key driverright now is the power price, which is $130/MWh today. You wouldn’tstop buying gas to generate power at that price until gas pricesreached about $13/MMBtu.

“Gas traded as high as $7.20 today at the border after startingthe day around $6.30. Today it got so far over next month’s pricethat everybody started selling storage gas. That started to slowdown the spike a little bit.” This morning, the forward price forDecember at the border was hovering around $6.30, he said.

“It’s causing more gas to come out of SoCal’s storage, whichalready is in bad shape. It’s roughly at 61 Bcf out of 100 Bcf orso, and this time last year it was roughly at 90 Bcf. Last yearduring the first couple weeks of November, they actually put acouple Bcf into storage, but right now it’s coming out at 700 to800 MMcf/d and they’re already 30 Bcf below last year. The demandside has to give. If it doesn’t, it is going to be a real tightmarket squeeze this winter.”

The Pacific Northwest once again put on a big show despite theannouncement that the opening of the 1.325 Bcf/d Alliance Pipelinewould be delayed again, this time until the end of November (see related story). “Today I saw the biggestspread I’ve every seen in terms of trading ranges,” said one trader inthe Pacific Northwest. “It was a Gong Show day. The PG&E Citygatetraded anywhere from $6.25 to $7.20. Malin ranged from $6.14 to about$7.12. Sumas was $6.14 to about $6.83 for a high.”

She said the Alliance delay was expected and therefore did nothave a major softening affect on prices. She noted Alliance alreadyis flowing 50% of its volumes and will continue to ramp up untilcommercial service begins. “It’s already had a major impact onprices here. We’re experiencing normal temperatures in Alberta, andprices are just going through the roof.”

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