Huge declines of 40 to 50 cents were seen in Friday’s cash market as futures prices finally gave way to significant downward pressure that had been mounting all week, pulling down the cash market with it.

Cash prices ended the day at or even below first-of-the-month indexes in many cases, but particularly in the Midcontinent region where points such as Demarc and Northern Ventura plummeted more than 50 cents and ended in the low $4.30s, more than a dime below indexes. Field quotes on Panhandle and ANR Southwest also dipped below index.

Declines of about 50 cents in the Northeast left points such as Tetco M3 and Transco Zone 6 New York below October bidweek levels. And in the West, the Southern California Border fell about 50 cents to the mid-$4.30s, which also was below index.

“People are just dumping gas and no one is transporting it down from Canada,” said a Pacific Northwest marketer. “There’s an abundance of gas out there. With temperatures as mild as they are right now, storage nearly full, and no demand, there simply is no reason for the market to hold onto this pipe dream of higher prices any longer. We’re warming up in the Pacific Northwest. I think cash will continue to come off some. But at some point cash and futures have to meet so futures may have to drop even faster.”

In the Rockies, Opal opened up the day weak compared to the Nymex and to where it was Thursday and dropped more than 40 cents to the low to mid $4.20s. Sumas fell and then traded around $4.20 before drifting down to about $4.15.

“Malin and Stanfield were trading below variable costs from AECO down, so it made no sense to transport gas down out of Canada,” the Pacific Northwest marketer said. “PG&E is packed and called an OFO for the weekend.”

Pacific Gas & Electric said it expected inventories on its California Gas Transmission system to rise above acceptable operating levels on Friday and Saturday. As a result, it called a systemwide stage 2 operational flow order with zero tolerance and $1/Dth penalties for imbalances. The company said it expects system inventories to reach 4,659 MMcf on Saturday and forecast that linepack could remain in the red zone (above 4,500 MMcf/d) through Monday.

Many other pipelines across the United States are experiencing similar situations as relatively mild temperatures and rising storage levels are forcing gas back into the pipeline grid.

Kern River warned shippers that there will be no banking over the weekend, because of too much gas in the pipe. In the Gulf Coast region, Southern Natural warned that it may call an OFO over the weekend because of long imbalances. Northern Natural said that due to higher than expected temperatures and high line pack, it also is having to allocate receipts. Northern said it expects temperatures across its system to average about 60 degrees Saturday and Sunday.

“It’s been a da-gum roller coaster this week and now the screen is down more than 30 cents,” said a Gulf Coast trader. “Something had to give because cash was a dollar below the Nymex. It’s still, in my opinion, way too high. Demand is way down. The weather is supposed to be very nice in the Southeast. Seventy degree weather doesn’t really bode well for natural gas demand. All the pipelines are trying to keep people more on top of their balances so there is plenty of excess gas on the market. Next week doesn’t look any different. Hold on tight, we’re going below $4.

“At some point fundamentals do kick in,” he added. “The market was just a way too strong this week, stronger than it should have been.”

The futures market has soared so high in part because of some cold winter weather forecasts, and concerns, over the upcoming winter. But when the National Oceanic and Atmospheric Administration (NOAA) came out with its updated winter forecast on Thursday that was mainly characterized by uncertainty for the major Midwestern and Eastern consuming regions, that seemed to prevent the market from reacting to the 81 Bcf storage injection this week, said IFR Pegasus futures analyst Tim Evans.

“The longer-term uncertainty as to the weather outlook may have slowed decision making regarding the storage report this week,” said Evans. “Private forecasters seem to be leaning more toward a colder than normal winter for the Midwest and a more normal winter in the Northeast. I think the government tends to be more conservative in its application of science. ‘I don’t know,’ might not be the response that the market wants to hear, but there are times when it’s the appropriate response to make rather than trying to put lipstick on a pig.”

NOAA reported on Thursday that temperatures in Alaska, the far West, Southwest and Southern Plains are expected to be above normal for the 2003-04 winter. But it said the absence of a strong El Nino or La Nina made it difficult to predict the weather for the rest of the country. As a result, it said that there are equal chances of above-, below- or near-normal temperatures for the rest of the nation.

The unclear weather forecast provided no guidance for traders on how to react to the weekly storage injection, which was right in line with expectations. The EIA said working gas levels rose 81 Bcf to 2,944 Bcf, or about 8 Bcf less than the five-year average. Working gas levels in the producing and West regions already exceed five-year averages. And with several weeks left in the traditional injection season, there is no doubt now that storage will reach historical norms.

In fact, there is a high possibility injections may continue well into November, Evans said. “We have been beating the five-year average weekly storage injections by about 26 Bcf/week since — like May. When you consider that in late November we may only withdraw something like 20 Bcf, that suggests that we may see a slight build well toward the end of [November]. That also means a later start to withdrawals and shrinks the withdrawal season.”

Evans said he thinks that the market finally understands the idea that storage will reach 3 Tcf. What it doesn’t get just yet is the whole reason why. “We do have this surplus in the market that is not going to just flip off like a light switch when withdrawals begin. It is going to continue into the winter. We really need some colder than normal temperatures and maybe well below normal temperatures to have that translate into a bullish storage situation.”

The other bearish thing going forward is that the storage withdrawal numbers for last winter are going to be dramatic comparisons. Storage reached record lows and there were multiple weeks of record withdrawals.

Evans said he’s not ready to say prices will fall below $2 this winter. “But certainly from current levels, I’m looking for downward pressure on prices and I don’t think that we will get a sustained rally in price without at least a short-term bullish trend in storage.”

In the next few days, he believes near-month futures will test $5 and then previous failed resistance at $4.98-99. If it breaks through that, it will retest early October support at $4.75 and then $4.565.

“To some extent I think this will hinge on short-term weather. If we get enough cash demand and cash prices move up a little bit, that will help the futures stay off of that prior bottom. That’s the one possibility this market has. We may give it a 20% probability of happening; it’s not something you want to mortgage your house on.”

The continuing very wide basis spread between current cash and November futures — about 60 cents at the Henry Hub — will remain a significant factor that should help pull down futures even further. “That idea of convergence is certainly relevant here,” said a Gulf Coast marketer. “We still have a long way to go and only a short time to get there.”

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.