Unaware of the impending Nymex rally that would begin in earnest at about 12:30 p.m. EDT, the natural gas cash market was mixed to slightly higher Wednesday as traders watched spreads closely for opportunities to eke out a penny or two. A majority of the day’s changes were of less than a dime, which translates into daily price deltas of less than 2% when you consider that absolute price levels are universally above $5.00.

However, that is all about to change. Soon after cash traders had finished up their dealings for the day, the futures market went on a tear that will not soon be forgotten by hedger nor speculator. It took less than two hours, but by the time the dust had settled, the price action was immense. After setting a new three-week high at $6.80, the July natural gas futures contract closed at $6.789, up 41 cents or 6.4% for the day (see futures story).

A Calgary marketer noted that tight spreads were the name of the game in the Pacific Northwest. While he was able to sell his Westcoast Station 2 gas at Sumas for roughly 3-5 cents (C$/GJ) over the variable cost of transportation, he said there was no such play from NOVA/AECO down to Malin. “With a variable at about 21 cents [US$/MMBtu], the spread today was out of the money by about 3 cents. I guess that gas [Alberta supply] is moving east to New York markets,” he said.

Although Wednesday’s trading ranges may look similar to Tuesday’s, the price action was different, a Midcontinent producer/marketer told NGI. “Midcontinent prices started in the $5.70s, fell to the $5.50s and then popped to the $5.80s late. Panhandle was particularly strong. We had a couple people calling for intraday needs… A little bit of a short-squeeze,” she said.

In the Rockies, she was monitoring the CIG-Cheyenne Hub spread, which inexplicably went to zero Tuesday before correcting on Wednesday. “With a forward haul fuel charge on CIG of 2.25% plus the commodity [charge], the spread should be a double digit.” Her assessment may be even a bit conservative. According to NGI’s daily historical data, the CIG-Cheyenne Hub spread averaged 21 cents during the month of May and never averaged less than 7 cents for any one trading day.

A New Jersey-based trader was at a loss to explain the Wednesday afternoon price spike in gas futures other than to say it was in sympathy with the rise in oil futures, which hit more than $54/bbl. “There is nothing really out there on the weather horizon to explain this. Sure we may see some eastern temps reach into the 80s this weekend, but that is really not going to translate into any abnormal air cooling load for the month of June,” he said.

The weakness in the cash market manifested itself in two ways Wednesday, the trader continued. “First, you saw Gulf Coast trading points trading at a deeper discount to the Hub than usual. And second, there was little or no incentive to ship gas to the Northeast. Even the paths where you can almost always cover the cost of transport were out of the money.”

A quick look at NGI’s historical daily cash prices reveals that the spread between Texas Eastern ELA and Texas Eastern M-3 averaged 52 cents during the month of May. It managed only about 45 cents on Wednesday. The same tightness was evident on Transco where the St. 65-Zone 6 NY spread was roughly 35 cents, well beneath the May average of 43 cents.

Looking at the natural gas storage report to be released at 10:30 EDT Thursday, Ron Denhardt, vice president of natural gas services for Strategic Energy & Economic Research Inc., said the range of injection predictions seems to run from 84 Bcf to 100 Bcf. The analyst said he is calling for a build of 90 Bcf.

“If working gas storage injections averaged the same level as last year with normal weather, working gas storage would end October at 3,450 Bcf,” he said. “With 10% warmer than normal weather, working gas storage would end October at 3,300 Bcf, the same level as last year.”

Factoring in storage’s current position, Denhardt said his best estimate is that working gas will “set a new record” by the end of October. “If achieved, these high storage levels would cause prices to decline sharply from current levels by September or October,” he said.

©Copyright 2005Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.