Gulf of Mexico gas production was slowly beginning to return to normal on Wednesday but 2.2 Bcf/d of gas remained shut in, according to the Minerals Management Service. Despite the supply issues, however, a sharp drop in gas futures prices well below psychological support at $5 sent cash prices tumbling 5-20 cents across the board.

The largest drops surprisingly occurred in the Gulf Coast region and in the Northeast, while the smallest declines were confined to the West where strong cooling demand, agricultural load and additional gas-fired generation were putting a floor under prices, according to observers.

The MMS said that as of Wednesday afternoon, 2,198 MMcf/d of gas and 200,409 b/d of oil remained shut in and 128 platforms and 17 rigs remained evacuated. If the MMS numbers are accurate for Monday, Tuesday and Wednesday, a total of about 6 Bcf of gas and 840,339 bbl of oil has been taken off the market so far this week. MMS raised its estimates of shut-in production on Tuesday to about 2.7 Bcf/d of gas and 418,164 bbl/d of oil. At her peak, Hurricane Claudette forced the evacuation of 287 platforms and 47 rigs.

Anadarko said only two of the 15 platforms that it evacuated were remanned by Wednesday afternoon. “We’re working toward bringing the rest of the platforms back on line hopefully by sometime tomorrow,” said spokeswoman Lee Warren.

Transcontinental Gas Pipeline, which experienced some of the largest gas shut ins, said it expected to be back to normal Thursday morning, but was only half there Wednesday afternoon. The pipeline had lost about 1 Bcf/d of supply during the peak of the platform evacuations on Tuesday. Texas Eastern said it expected the 400 MMcf/d that it lost to return completely on Thursday. All but about 75 MMcf/d was returned by Wednesday afternoon. Other affected pipelines said they also expected to return to normal operations sometime on Thursday.

Despite the supply cuts, most Northeast gas users handled the situation calmly. “We’ve just been sitting tight and not doing anything because we don’t know whether our gas is going to show up. We’ve had some cuts, but it’s stumbling back,” said a Northeast LDC and power generator. “It’s not a major concern. We have storage that we can rely on, and it’s really not affecting us dramatically because we didn’t step out and sell a lot of gas. Cash prices are down and it’s quiet, but it’s been that way for awhile.”

Gulf and Northeast cash prices fell about 15-20 cents on average Wednesday compared to the previous day. Spreads remained relatively flat. “People are buying to stuff it into the ground, and there’s the odd power plant running, but most of them have enough gas base-loaded for the whole month so that they don’t need to buy any incremental gas on the day,” said a New England marketer. “The screen has been pretty volatile day to day, but cash trading has been boring. It’s been like the movie ‘Ground Hog Day.'”

He said cash prices at the Henry Hub were trading down 15 cents or so compared to Tuesday’s levels — to near $5, but most cash transactions were done before the big move in the August futures contract. Northeast points were a little weaker relative to the Hub. Dracut was 25 cents over the Hub, and Algonquin was 45 cents over the Hub. Dracut was trading around $5.25 on Wednesday, and Algonquin was in the mid $5.40s.

“The storage situation is still low compared to the five-year average, and although we’re predicting an injection around 90 Bcf this week, next week’s injection could be much smaller due to the hurricane,” the marketer said. “That could be a fundamental driver for this market going forward. I think people will finally realize what impact a hurricane does have on supply. They apparently missed it this week.”

He predicted that next week’s storage injection could be as low as 45 Bcf if production cuts continue into Friday. “I think it will take until Thursday or Friday to get completely back to full production.

“The drop in futures today, I think, was driven by the psychological move below $5. Everyone knew if it got past $4.95 that it was going down to $4.80, so they just jumped on it. I think we’ll trade in the $4.80-$5.00 range now until we see anything significant come out of the storage numbers and that could happen as soon as next week.”

Cash prices were much stronger in the West relative to the futures screen Wednesday. “I’d say Rockies points moved in at least a nickel closer to the screen, even though they may have dropped a few pennies from yesterday. We have local cooling demand and generation. Transport was working from Sumas to San Juan. Kern River is hot. Everything is cooking right now. Power is pulling gas heavy.

“In Denver and Salt Lake City, all the utilities are buying right now,” he added. “All the on-system generators on Kern River are burning too. Everything is firing at once. Basis tightened, but in the Rockies it’s still kind of trailing current cash by a good 20 cents. I’m not sure why there’s a discount on August Rockies prices, other than the fact that people are concerned about some of this hot weather going away before August.”

August Opal was trading as much as 78 cents under the Henry Hub Wednesday. “When the screen was printing $4.90, August Rockies were at $4.20, but cash was $4.50. Usually the forward month basis is flat to a premium to current cash particularly in the injection season,” he noted. “There’s no gas being injected right now. Either the basis is going to tighten or cash is going to come off.”

He said that SoCalGas is seeing substantial storage withdrawals instead of injections currently. El Paso also has been having problems with low inventories due to high storage withdrawals. El Paso continued its unauthorized overpull penalty Wednesday due to maximum Washington Ranch storage withdrawals. Meanwhile, PG&E is fast closing in on low linepack with significant on-system demand.

“PG&E system inventories are getting on the low side,” said a California marketer. “Everyday they have been going out short, but they haven’t called an OFO yet. It’s likely they will call one later in the week.”

Another trader said he believes western prices are “nearing a bottom. There are a lot of people coming out now to buy gas to generate power. In the Pacific Northwest you have power that used to be $25-30 and now Mid-C is as high as $53. I think hydro is declining. There are more gas-fired generators out there buying now than there had been in quite a while.”

Another western marketer said the entire pipeline path from Kingsgate south is “almost 100% full. I know a lot of the agricultural load in California has been increasing. Plus there is warmer weather in the interior of the state.” She said Malin traded up to $4.65 but was off from Tuesday a few cents. Kingsgate was in the low $4.40s.

“Cash prices probably will come down tomorrow because of the drop in futures, but they should stay strong relative to the screen,” she said.

In the Midwest, cooler temperatures are expected to begin pressuring prices even lower. Weather in Chicago is expected to into the 60s and low 70s on Friday, warm up for the weekend, but then turn cooler again early next week.

The National Weather Service’s six to 10-day forecast shows a large area of below normal temperatures forming over the Midwest, the Great Lakes, the Northeast, Mid Atlantic and even parts of the Southeast. However, above normal temperatures are expected over the entire western United States.

“At plus 13 for November-March, Chicago basis is weak compared with historical levels,” said a marketer. “It is also weak compared with Dawn basis, which at plus 35-36 for November-March is trading at a large premium to its historical norms. The turned back capacity on TransCanada beginning next month will force the pipeline to raise its rates for this winter and increase the cost of gas at Dawn,” he predicted. Meanwhile, MichCon November-March basis has traded higher in sympathy with Dawn and was bid-asked at 22-23 on Wednesday, he said. MichCon averaged plus 7 to Chicago last winter, but now it is at plus 9-10, he said.

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