Cash prices rose sharply Wednesday morning on the heels of the futures market but then reversed course when the entire energy futures complex suddenly plummeted. However, most cash averages showed daily net increases of 15-35 cents, with Florida, the Gulf Coast, Northeast and Midwest points posting the highest gains and with smaller gains in the West.

Crude futures dumped $2.83/bbl to end the day at $63.25, while the near month natural gas contract lost 36.1 cents to end at $9.319 (see related story). “When the screen went up and tested $9.80s everything came up with it and a lot traded before it came off,” said a Gulf Coast producer. “But with the screen now in the $9.40s and falling, cash will trade way down on Thursday. I’m expecting we’ll lose 40 cents easy, maybe even more depending on the storage number and the direction of futures tomorrow.”

Tim Evans, futures analyst with Thomson Financial, said the “bubble in energy values may indeed be in the process of bursting, but it will take some time to know for sure.” He noted that the energy market has a history of “resurrections” with many traders reluctant to change their bullish views even in spite of a large price decline. Nevertheless, Evans and other sources anticipate a further probe to the downside on Thursday.

The cash market had held a premium to futures, but with temperatures moderating, and futures turning south after an amazing three weeks of increases, sources warned that the entire picture may soon change.

“You would expect to see things return to some sort of a contango structure at some point with cash below those winter futures months. There has been an internal structural problem to the market and that eventually has to go away,” said a Gulf Coast trader. “The futures market also is in overbought territory and prices are at a level where we’ve seen some major tops in the past. December 2000 we topped out at $10.10 and in February 2003 we had that same $10.10 high in the open outcry session. That is a level that in the past we have only reached with extreme cold temperatures and tight storage levels. We’re in August now. The storage surplus is still there. The weather is cooling, and there are no hurricanes in the Gulf. Something is going to give and it started to happen today.”

Another Gulf Coast source noted that there have already been 24 days in the Northeast this summer with over 90 degree heat compared to only two days last summer over the same period. “That’s a pretty telling tale right there of what has happened,” he said. “But if you look at the six- to 10-day forecast right now, some things clearly are changing. It looks the East may even be having a few below normal areas. Our average high temperatures are dropping too. I think we are about to see some moderation in the cash market.”

The latest six to 10-day forecast from the National Weather Service calls for above normal temperatures across most of the West, the Rockies, Upper Midwest and parts of New England, with normal temperatures along most of the East Coast, Great Lakes and Ohio Valley. There is a large area of below normal temperatures expected over Texas, parts of the Midcontinent and parts of the Southeast, excluding Florida.

Heat and pipeline constraints drove Florida prices sharply higher Wednesday. Continued mid 90-degree heat forced FGT to declare another Overage Alert Day with a 5% tolerance. FGT also has some scheduling restrictions due to unexpected maintenance at compressor station three in Texas and its St. Helena interconnect with Transco.

A Northeast marketer said despite the higher prices early Wednesday it seemed like there were more sellers in the market than buyers. “Generally the spreads have been fairly good between Transco Zone 3 and Zone 6 in New York, but they were off a little bit today, down probably a nickel or so.

“I don’t think there was a whole lot of demand up there right now. My usual big buyers on Transco Zone 3 did not want anything from me, said they didn’t need it because the temperature was off. Some of my other buyers are burning oil and have been for most of the month. I think we may see some weakness tomorrow, but not a collapse, just a little fall off.

“It could be pretty ugly in the short-term though. The storage number will have an impact if it’s in the mid to high 60s Bcf or something.”

The United States was extremely hot last week with average cooling degree-days 24% above normal. The only region to report normal CDDs was the West South Central. As a result, many forecasters are predicting that the weekly storage injection will come in well below historical averages at somewhere between 45 and 60 Bcf.

Jim Osten a consultant at Global Insight said he’s expecting a 50 Bcf injection. Citigroup’s Kyle Cooper is forecasting something between 49 and 59 Bcf compared to 78 Bcf last year and a five year average of 60 Bcf. Evans of Thomson Financial said he’s forecasting a 40-50 Bcf injection. While Ron Denhardt of Strategic Energy & Economic Research is projecting a 52 Bcf injection.

In order for working gas levels in storage to reach 3,300 Bcf by the week ending Friday Nov. 4, about 837 Bcf of gas will have to be injected, or about 64.4 Bcf/week. The Energy Information Administration last week reported a 43 Bcf net injection into storage. Even if the industry added only 43 Bcf per week over the next 13 weeks working gas levels still would end the season over 3 Tcf.

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