Cash prices jumped above $8 again in the Northeast on Tuesday and most spot points nationwide posted solid gains for the second day in a row as colder weather and short-term forecasts of below normal temperatures across most of the nation put the massive gas storage surplus temporarily on the back burner.

“It’s cold in California and across most of the West right now and we’re seeing a lot of heating load. That’s going to continue for at least another week or two, maybe longer” said a western energy services provider. “But it’s not that much colder than normal. What most people have been doing is buying gas on the spot market rather than withdrawing it from storage and that’s helping push prices higher.”

However, it’s also leaving a lot of gas in the ground and that could have a pretty significant impact on the market down the road, he noted.

“The spreads are there for injections but in California we are running out of room. That’s one issue I’m pretty concerned about. With storage so full and hydro so high, PG&E is going to have an unprecedented number of [operational flow orders] this spring and early summer,” he predicted.

“That’s going to depress prices. Spot prices over the weekends are just going to go into the tank because people just won’t have any place to put their gas. That’s going to snowball across the West. You are going to start seeing Northwest and Rockies prices get hit, too.”

He said many Southern California customers have “flipped their storage” to the next “gas year” already. “What people didn’t do is withdraw their gas. Even with the cost of money, the spreads are favorable enough to switch and enhance your storage values. Right now I should be taking gas out of SoCal and western storage but I’ve been putting some in or not doing anything. I’ve switched to the 2006-2007 winter heating season and bought my new hedges already. I’ve expanded the spreads that I had before. It’s a good time to do that.”

The favorable prices last week also provided customers an opportunity to lock in some attractive longer-term values, he said. “A lot of my commercial customers are looking at one, two and even three-year deals right now. Normally they would buy one-year of supply, but a lot of them are looking at two years and three years and taking a percentage of their needs. With the Nymex sitting in the high $7s and basis at minus a buck at SoCal, they can get $6 gas. That’s better than the $10-15 they were looking at six months ago, and they can’t go wrong taking 30-40% of their load and locking it in.”

However, the current weather pattern is quickly changing the price picture. Cash jumped 15-70 cents depending on location Tuesday a day after posting similar gains. New York prices were up $1.35 since price levels on Friday for the weekend. Chicago and the Henry Hub were up about 75 cents on Tuesday from where daily prices were on Friday.

High temperatures in the Midwest, Great Lakes, Ohio Valley, Gulf Coast and parts of the Southeast dropped more than 25 degrees in 24 hours, while much of the West remains below normal.

“We were getting so long, we needed some colder weather to kind of balance us out a little bit,” said a Michigan supplier. “In addition to the mild weather we had over the last few weeks people have really dialed down their demand. Gas costs have hurt a lot of businesses, colleges, industries and many have cut back. We’re sitting on some gas so the cool down will do us good. The weather forecasts are calling for below-normal temperatures through the end of the month across most of the country and that has got this market moving up again. I’m not sure how long it will last though.”

A Gulf Coast marketer noted that there was a similar rally last March and into early April but then the market retreated in late May before rising again on very hot summer weather.

An important question that has raised the bar in this market is how much Gulf gas production currently shut in will eventually return. In addition to weather news, any answers to that question will have a significant market impact.

The latest report from Bentek Energy, which tracks pipeline nominations, shows net shut-ins of 1,172 MMcf/d, including 1,517 MMcf/d of production shut in offshore Louisiana and a 345 MMcf/d production increase onshore and offshore Texas compared to levels on Aug. 26, 2005 prior to hurricanes Katrina and Rita. The largest amount of shut-in production remains upstream of Tennessee Gas Pipeline (988 MMcf/d) offshore Louisiana, followed by Transco (441 MMcf/d), Texas Eastern (160 MMcf/d), Sea Robin (139), Mississippi Canyon (119), Targa’s Venice system (117), Trunkline (109), Gulf South (89) and lesser amounts on multiple other pipelines. Destin, Stingray, Florida Gas, Columbia Gulf and the Garden Banks systems are flowing more gas now than they were last August. In Texas, Tennessee Gas is flowing 472 MMcf/d more gas production currently than it was transporting Aug. 26 last summer.

“A lot of that offshore production that was lost due to the hurricanes may not be coming back, but we are seeing some new stuff coming online both onshore and offshore,” the Gulf Coast marketer said. “We still have to quantify what is lost forever. The Mars platform will be coming back this summer. Then Thunder Horse will come online. Those are some pretty big chunks of gas. It’s hard to see what the net flows will look like by June.

“One big question is what is going to happen to Texas basis over the next couple months. It has been such a pivot point in the past. In previous years you traded Ship Channel at plus 3-4 cents in the summer and minus 3-4 cents in the winter. Now we’re seeing minus 30, 40, 70 cents. Its so wide to Nymex. Part of the reason is shut-in production but another part is the Barnett Shale. Texas is going to offset a lot of what was lost offshore.”

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