Nat Gas was true to form following the weekly price movement pattern that has been in play for the last three weeks. A short covering rally ahead of the weekly inventory report followed by a sell-off after the report was released. This week the sell-off was mild and today the market has been eking out a small gain as of this writing. The spot March Nymex futures contract has held the $3.20/mmbtu support and remain in the $3.20 to $3.50/mmbtu trading range that has been the dominant trading range for just about the whole winter heating season. The April contract is also trading within the same trading range although the first/second month futures contracts remain in a contango.

The winter heating season has certainly been colder than last year and consumption of Nat Gas for heating has been above last year. However, it has been about 3% warmer than normal. End of the winter heating season inventory will fall below last year but above the five year average in the range of 1.9 to 2 TCF.

With the economics of coal to Nat Gas switching biased to the coal side coal related Nat Gas demand is also likely to decline over the coming months unless there is a sudden collapse in Nat Gas prices,. As such as time moves forward although there has been more heating related consumption this winter some of the switching demand experienced last year will not be repeated. We are likely to return to 2010/2011 level of switching demand. Thus as we enter the injection season we are likely to see an over performance of weekly injections versus last year unless the summer cooling session is much warmer than last year.

From the latest weekly EIA Nat Gas report total demand for the report week was up. According to Bentek estimates, overall natural gas consumption for the nation increased by 6.1 percent. The residential/commercial sector, the biggest gas-consuming sector during the winter, consumed 7.4 percent more natural gas week-on-week. Natural gas consumption for power generation was also up, increasing by 7.3 percent. The Midwest faced colder temperatures week-on-week, consuming 23.6 percent more natural gas for power generation. The Southeast, which consumes the most natural gas for power generation, saw depressed temperatures relative to the 30-year norm, and burned 23.0 percent more natural gas in that sector. West Coast consumers faced relatively warmer temperatures with the Southwest, Pacific Northwest, and Rockies consuming 7.1 percent, 13.8 percent, and 2.1 percent less natural gas for power generation over the report period, respectively.

Total supply for the report week was essentially flat. Bentek estimates an overall supply increase of 0.1 percent for the report period. U.S. gross and dry natural gas production were down 0.4 percent. A net increase in imports from Canada of 3.3 percent mostly offset the decrease in production. Driving the increase in imports from Canada was a 25.4 percent rise in imports to the Midwest. LNG imports increased by 50 percent, although they are a very minor contributor to U.S. supply.

Next week Iran and P5+1 meet in Kazakhstan with rumors that the west may possibly be offering Iran a significant offer. I have not seen any other details on this topic but certainly if this means that there is a possibility of a deal of some sorts it would certainly be bearish for oil as it would more than likely involve a lifting of the current sanctions on Iran and thus an increase in oil flow from Iran. I would not count on any deal as the history of this negotiations go back many years and so far nothing has been accomplished. In any event this needs to be high on the radar for next week as it could turn out to be market mover even if nothing is accomplished as I believe some of the selling we have seen in oil over the last several days was the market responding to the aforementioned rumor.

Yesterday's economic data out of the US was mixed to slightly negative adding more fuel to the selling fire for the risk asset markets. Overnight the economic data was also mixed with Singapore's Q4 GDP coming in much better than expected and better than the first reading while German business confidence rose to 107.4 from 104.3 in January That was the fourth straight gain. On the other hand the EU commission came out with their forecast indicating that they expect the EU to contract for the second year in a row in 2013. They are projecting GDP for the EU will decline by 0.3% compared with their last projection in November which actually projected a growth rate of 0.1%. So overall this week the economic data has been neutral at best and has certainly not provided much support to the global risk asset markets.

I am maintaining my Nat Gas view and bias at neutral even as the weather forecasts are less supportive than earlier in the week. 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 still in the heart of the winter heating season and currently those forecasts have turned a tad more bullish at the moment.

I am maintaining my view of WTI at neutral to cautiously bearish and maintaining my view for Brent at neutral to cautiously bearish. That said I am continuing to fly the caution flag as any additional equity market corrections will impact oil prices in much the same way... a round of profit taking selling. Furthermore the spot Brent contract has breached its technical resistance level of about $118/bbl suggesting lower prices in the short term.

Markets are higher as shown in the following table.

Best regards,
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy

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