This is an analysis taken from:

http://www.eia.doe.gov/natural_gas/data_publications/natural_gas_weekl y_market_update/ngwmu.html

Comments by Steven King's PetroDispatch:

Storage, the key to spot natural gas prices

Most of the smaller and mid-sized O&G companies are actually natural gas companies; therefore, the winter heating season is of prime importance to their cash flow. As the cold weather chills the northern states, southern natural gas producers begin to feel better. Most of them have a portion of thier delivery hedged, but much floats on the spot. This is where the swing in the winter's cash flow comes from. Warmer weater means storage gas will be taken first, then the hedged gas and finally, (if there is demand left to fill) the higher spot.

As a second week of low temperatures dominated the weather on the East Coast, prices at most major spot markets moved up close to $0.30 per MMBtu, their largest weekly increases this winter. On the futures market, the NYMEX February contract for delivery at the Henry Hub closed on Thursday, January 27, at $2.610 per MMBtu, $0.27 higher than the final price for the January contract ($2.341) and $0.80 above last year s February contract ($1.810).

The winter season s most severe weather covered an area from North Carolina to New England, while cold weather also prevailed in many areas of the Midwest and the Southeast. The composite average temperatures were 6 to 10 degrees below normal each day last week. This was reflected in spot price increases of $0.20 to $0.30 per MMBtu at markets that serve the Midwest and the East last week.

According to the American Gas Association ( AGA), an estimated 195 Bcf was withdrawn from storage during the week ending Friday, January 21. This is the largest level of weekly withdrawals this winter and is the result of low temperatures during the third week of January. The majority of the withdrawals occurred in the East consuming region where 136 Bcf was taken from storage to meet the weather-induced demand. Combining the EIA estimate of 2,464 Bcf in storage at the end of December with AGA s withdrawal reports through January 21, working gas on hand at the end of the third week of January stood at 2,044 Bcf. This is compared to about 3,000 Bcf at the start of winter.

As low temperatures expanded over a larger area to affect almost all of the eastern third of the country, net withdrawals during the fourth week of January are likely to exceed the previous week s estimate. Just a slight increase in the average rate of net storage withdrawals during the final 10 days of the January would result in end-of-month stocks below the 1,762 Bcf average for the previous 5 years (1995-99).

Consistent with a second week of some of the coldest weather of the season, spot prices at the Henry Hub increased each day last week and ended trading at about $2.85 per MMBtu, up $0.55 in 2 weeks.

Although the February contract moved up only 9 cents per MMBtu during its final week of trading to expire at $2.610, it had increased almost $0.45 per MMBtu since the January 7 settlement price of $2.172. Interest in the February contract increased each day last week.

Summary: Widespread cold weather contributed to the steepest spot market prices increases of the winter last week. The February futures contract continued to trend up, closing $0.27 higher than the January contract. Net storage withdrawals during the third week of January reached their highest level of the season at 195 Bcf. Continued high storage withdrawals would cause stock levels to fall below the previous 5-year average.

-- Laurane (familyties@rttinc.com), February 03, 2000