The weather continues to dominate the short term direction of Nat Gas prices. Market participants are trying to balance the very cold current weather in many parts of the US compared to an ever changing short term forecast period. The current cold conditions are expected to last at least through the end of this week (especially in the high demand northeast area of the US). Obviously this is a bullish scenario for the very short term. However, the latest six to ten day and eight to fourteen day forecasts (issued yesterday afternoon) are decidedly less bullish than those issued toward the end of last week. In fact the current NOAA forecasts are biased to the bearish side.
The six to ten day forecast is showing a significant warming trend for the last four days of January with temperatures along the eastern half of the US expected to be well above normal. The eight to fourteen day forecast is slightly more supportive in that the above normal temperatures are primarily focused in a smaller portion of the northeast and most of the southern part of the US. Based on this forecast the first four days of February are not likely to experience above normal heating demand.
Adding to the skepticism the 90 day forecast issued by NOAA late last week shows the three month period of February through April to be above normal along the northeast with hardly any area of the country expecting below normal temperatures. Breaking it down a bit more February should be a tad more winter like but not very cold. There is a projected pocket in the upper mid west that is expecting below normal temperatures with the east coast expecting normal temperatures. Beyond February the forecast is calling for what looks like an early Spring with March and April projected to experience above normal temperatures across most of the US.
Overall I do not see enough weather support (basis the forecasts) to send Nat Gas prices surging higher anytime soon(unless the forecasts change). I do see enough support basis the February forecast to keep the market trading with a $3/mmbtu handle but not enough to breakout above $4/mmbtu. Basis the latest temperature forecasts for the rest of the winter heating season I am still expecting ending inventories to be well above average but below last year's record ending inventory level.
This week the EIA will release its inventory on its normal schedule and time...Thursday January 24th at 10:30 AM. This week I am projecting an average withdrawal of 170 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 162 BCF and the normal five year net withdrawal for the same week of 176 BCF. Bottom line the inventory surplus will narrow marginally this week versus last year and hold steady compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be above the net withdrawal level for last year but below the five year average net withdrawal for the same week if the actual outcome is in sync with my forecast.
If the actual EIA data is in line with my projections the year over year deficit will widen to about 155 BCF. The surplus versus the five year average for the same week will come in around 321 BCF. This will be a neutral weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a wide range of 120 BCF to about a 180 BCF net withdrawal with the consensus still forming.
In an addendum to last week's EIA STEO report they discussed how Nat Gas supply constraints in New England have had a big impact on regional energy prices so far this winter. Following are the main highlights from the supplement.
• Since November, New England has had the highest average spot natural gas prices in the nation. Full pipelines from the west and south limit further deliveries from most of North America, while high international prices and declining production in eastern Canada pose challenges in making up the difference from the north and east, except at higher prices.
• As a result of these market conditions, New England natural gas and electric power prices this winter will be volatile at times. During November and December, spot natural prices in the northeastern United States went up and down in relation to weather-driven pipeline constraints.
• These price movements have continued into January 2013 so far. Looking to the rest of this winter, recent forward market prices indicate that New England's high natural gas prices could persist and rival northwestern European prices, which could lead to an increase in LNG imports.
Oil and most commodity markets are starting the shortened US trading week higher after the Bank of Japan came out with an aggressive monetary program after over 20 years of going nowhere. They shifted their program to an open ended asset purchase program... much like the US Central Bank but delaying the start of the program until next year. They did vote for a 2% inflation target to be achieved at the earliest possible time. If they do achieve this rate of inflation it will be the first time since the early 1990's. The market is somewhat disappointed over the BOJ kicking the open ended purchase program down the road to 2014. Although commodities were firmer over the BOJ plan equities were lower.
In the US the House Republicans have decided to vote to expand the US debt ceiling to the middle of May. The vote will come on Wednesday. This is a bit of a strategy change for the Republicans who have been insisting that any increase in the debt ceiling had to come with reduced spending. The objective is to allow more time for negotiations and to push the Senate to possibly put forth a budget. I view this situation much as the fiscal cliff nonsense that lasted for months and did not culminate until the very end of 2012. The markets will once again be held hostage to the 30 second news snippets coming from all sides until a lasting deal is finally reached. I expect a deal will eventually be reached.
I am maintaining my Nat Gas view at neutral with an eye toward the downside if we get further bearish weather forecasts. As I have been discussing for weeks the direction of Nat Gas prices are primarily dependent on the actual and forecasted weather pattern now that we are in the heart of the winter heating season and currently those forecasts are bearish at the moment.
I am maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a move to the upside now that the spot WTI contract has breached its upper resistance level.
Markets are mostly higher as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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