Swing prices exploded Monday in hyper-volatile trading featuring across-the-board multi-dollar gains, with Northeast quotes soaring to peaks of more than $30 in some cases and most Gulf Coast/Midcontinent/Midwest numbers averaging between $10 and $20. The spikes weren’t quite as spectacular in the West, but still impressive as the Rockies market soared to $6-8, Malin peaked at more than $10 and El Paso-Permian was quoted as high as $15.95.

“Things went a little crazy today,” said a Northeast utility buyer in classic understatement as she reported Dominion-South Point purchases at $28-29.

The spikes came as winter demonstrated that it isn’t ready yet to relax its icy grip. Cold weather dominated the picture everywhere except in Florida and the desert Southwest, and sub-zero readings were being recorded in the Upper Plains and Western Canada. Snow and/or freezing temperatures reached as far south as a belt from North Texas through the Carolinas. An arctic system dominated much of the West and winter storm warnings were posted for the higher elevations even in Southern California and the Southwest.

And the Northeast can’t expect any near-term relief, according to The Weather Channel; instead, it will only get colder there towards the middle of this week. Not only that, but in its six- to 10-day forecast released Sunday, the National Weather Service predicts below normal temperatures for the entire U.S. in the first few days of March except for a normal strip stretching from South Texas through the Carolinas and above normal in southern Florida.

Monday’s spikes were not all weather-driven, however, an eastern utility buyer said. “There’s a lot more to it. First, March futures moved up to $7.20 in Access over the weekend. Then over-the-counter prices went to $8.75 before the Nymex pit opened [for the open-outcry session] this morning. That gave people in cash markets a good clue about price direction before they got going.”

The March screen had soared by more than $1.70 to $8.35 in early-afternoon activity after peaking at $8.45, and the crude oil and heating oil contracts for April (March trading there expired last week) also recorded very strong advances. Gas futures went on to further gains, ending the day up $2.531 to $9.137.

“Actually, I think Friday’s cash spikes led the screen,” the buyer continued. “I’m just shocked by the ferocity of the latest move.” He said basis markets for March were soaring in conjunction with swing numbers, with some points gaining nearly a dollar. Texas Eastern M-3 was seeing a basis bid-ask spread of plus $2.10-30 Monday, he said, with Transco Zone 6-NYC about the same.

Another source pointed out that the combination of storage worries and reports of falling production continue to weigh on traders minds. He noted a report Friday from Lehman Brothers analyst Thomas Driscoll that included this: “Recent storage behavior implies that the market is 4-5 [Bcf/d] short of supply. A period of very high gas prices may be required to balance the market.”

And the Raymond James Energy Group weighed in Monday with this analysis: “Actual results from 37 of the largest natural gas producers in the U.S. indicate that natural gas production has declined for the sixth consecutive quarter. Specifically, fourth quarter natural gas production from the companies in our survey was down by 2.7% sequentially and 6.4% year-over-year. These results remain in line with our hypothesis that U.S. gas production will continue to be down between 6-7% on a year-to-year basis.

“Furthermore, with drilling activity still at historically depressed levels, natural gas production will likely continue its rapid deterioration for the foreseeable future. We continue to believe that the U.S. is on the verge of another major natural gas supply shortage.”

Pipeline constraints continued to mount beyond the OFOs and similar actions experienced late last week and also were starting to show up in the West (see Transportation Notes). In advising shippers to closely monitor their supply sources and insure that production volumes match scheduled volumes, ANR warned of the potential for wellhead freeze-offs in its Oklahoma gathering area later this week. And Northwest said its Jackson Prairie storage volumes are still declining because of northbound nominations through the Kemmerer (WY) Station continuing to far exceed the station’s design capacity. Further Jackson Prairie reductions could result in an OFO, Northwest said.

Despite any sticker shock that buyers may have experienced, it was a good day to make purchases early. Sources agreed in all regions that the lowest prices occurred in the morning’s first few deals, and it was up, up and away from there for nearly all points. A Florida utility buyer said citygates started around $9, and although she didn’t do any gate deals herself, she’d heard of them rising to $14 or more later. The buyers also noted that Florida Gas Transmission was warning of the potential for an Overage Alert Day notice (see Transportation Notes) even with market-area weather staying mild. “I think it’s not a case of our demand [in Florida] shooting up FGT numbers and raising the possibility of an OAD, but rather competition from the Northeast for Gulf Coast supply, especially in the Mobile Bay area,” she said.

A Northeast utility buyer had an occasional citygate quote of $21.50 or $22.50, but noted that most deals tend to be in even-dollar amounts when they get up to Monday’s superheated levels.

“The sky is falling! The sky is falling!” was one western source’s reaction to the spikes. Monday’s market was sheer craziness, he continued, “or maybe it’s actually stupidity when people are willing to pay these prices.” Almost nobody was shipping intra-Alberta gas southward, preferring to send it east to the much higher-priced markets in the Midwest and Northeast, he said. “That had some people buying at Malin for up to $10 and backhauling through the PG&E and Transwestern systems to the Permian Basin, where they could get as much as $15-16 in El Paso’s Keystone pool.” El Paso’s San Juan Crossover is fully subscribed, so Transwestern currently offers the only effective interruptible backhauls in the Southwest, he explained.

The source added that he had monitored Opal Plant activity over the weekend and it was processing something like 935 MMcf/d, down from more than 1 Bcf normally. Jonah Field problems Friday caused the weekend cutbacks, he said, and the deficit probably grew even greater Monday with Kern River reporting LaBarge Station compressor problems behind Opal (see Transportation Notes). He only had a PG&E-Topock deal at $9.70 to report for next-day swing, saying he “got real busy with intraday stuff,” which was priced considerably higher. He quoted intraday numbers of $13.50 for Transwestern-East of Thoreau and $11.50 for Kern River.

Commenting on an OFO by Public Service Co. of Colorado (see Transportation Notes), the source said it was “essentially requiring customers to buy more gas so the utility doesn’t have to do it.”

“We’ve got a perfect storm market scenario here” with the storage situation, the temperatures and now with storage ratchets kicking in, a Gulf Coast producer said. “With market area storage you need to inject and withdraw at a certain rate. That is to say, as the storage field gets depleted and the pressure is down, the rate at which you can further pull out of storage gets ratcheted down. LDCs in the market area are typically getting warmer weather before their withdrawals are ratcheted down, but because of the continuing cold and previous large storage withdrawals, they are running into this earlier than they would like. So they are having to make up with current production instead of storage gas.”

Prices peaked between 10:15 and 10:30 a.m. EST and then came back down a bit, the producer went on. “The bid/ask spread at the Henry Hub was $16-20. I don’t think anything at that $20 level got hit, but these are easily the highest prices at the Hub I’ve ever seen. Later in the day things pulled back a bit and the Hub wound up in the $12-13 area. At a lot of production locations there were not a lot of sellers out there, so late prices really didn’t fall that much at those locations. Tetco West Louisiana was an example.

“It [market] is pretty inflated right now, so we may see things pull back some in coming days but overall I don’t think you will see anything like a major sell-off until the weather really warms up. When these prices trickle down to end-users, there are going to be problems for the industry. Just like three years ago, you are going to see a lot of non-pays.”

For a marketer, “fear, panic and cold weather” were responsible for Chicago’s price rise of about $7. Foothills Pipeline suffered a mechanical failure that constrained roughly 12% of its usual flow to Northern Border, he observed. It’s hard to say if prices will move lower Tuesday, he said. “On the one side, gas day Tuesday is the coldest in the forecast. On the other side, temperatures don’t moderate too much.:

Storage is getting so low that LDCs had no choice but to call on all the gas they could, the marketer continued. “The reason why LDCs are in this predicament is because the industrial and commercial customers behind their system have — in an effort to avoid buying expensive gas in the day market — drawn down storage to near-record-low levels…This is February of 1996 all over again. I am one of the old guys in this market, so I was around back then and know what this market is capable of. It seems like everyone else either is too new to the industry to remember or has just plain forgot.”

With another 165-180 Bcf storage withdrawal report possible Thursday and cold weather forecast through the forseeable future, dropping below 700 Bcf in storage is likely by the end of March, the marketer said. “Another factor compounding the storage situation is that some of the larger players such as Dynegy, Aquila and El Paso withdrew heavily from storage in an effort to beef up their cash reserves. And why not? Heading into this withdrawal season, storage was at a very high level and there was an El Nino event that was supposedly going to make for an exceptionally warm February and March. Why not sell storage gas early in the season and take advantage of the high gas prices then? Lots of people had the same idea, and that was to short Chicago and be long Henry Hub. It was those folks that were out there as buyers today [Monday].”

In a note to clients, Driscoll of Lehman Brothers said colder than normal weather “is expected to lead to strong storage withdrawals over the next two weeks. We estimate that this week’s storage report…will be a withdrawal of about 160 Bcf (50 Bcf more than our previous estimate of 110 Bcf) compared to 74 Bcf a year ago and a five-year average withdrawal of 95 Bcf. We estimate that next week’s storage report will show a withdrawal of 190 bcf compared to a withdrawal of 143 bcf a year ago and the five-year average withdrawal of 89 Bcf.”

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