Nat Gas futures failed to take the next step up the ladder on Tuesday as the industry awaits the main data point of the week...Thursday's EIA inventory report. This week's report will be bullish in that it will show a larger net withdrawal than both last year and the five year average for the same week. The futures market drifted lower but still remains well above the $3.50/mmbtu technical support level for the sixth day in a row or the longest streak since back in December of 2012.
The market may struggle after this week's expected bullish inventory report as the latest NOAA six to ten day and eight to fourteen day forecasts are both less supportive than those from last week. Temperatures are moderating as we move closer to spring. Even cold temperatures this time of the year do not result in the same level of Nat Gas heating related demand as in the heart of the winter heating season. We are very near the start of the lower demand shoulder season and as such Nat Gas futures prices are going to have trouble moving significantly higher from current levels. Today the spot futures market actually breached the next resistance level of $3.66/mmbtu but failed to settle above this level.
Today the EIA released their monthly Short Term Energy Outlook. Following are the main Nat Gas highlights from the EIA report.
• In the past few years, U.S. pipeline exports of natural gas to Mexico have increased substantially, from around 0.9 billion cubic feet per day (Bcf/d) in 2010 to 1.7 Bcf/d in 2012. Mexico has expanded its natural-gas-fired power generation in recent years, and plans to continue to do so. Competitively-priced natural gas from the United States makes pipeline imports by Mexico an attractive option.
• According to EIA's monthly natural gas gross production report, gross withdrawals fell in December 2012 from the month before in all major producing areas except Alaska. Total gross withdrawals fell about 0.7 percent from the November 2012 level to 82.6 Bcf/d in December 2012, equivalent to about 69.3 Bcf/d of marketed production. As natural gas production in the United States shifts inland, well freeze-offs have become a greater supply disruption risk during the winter. The 3.5-percent decline between November and December in New Mexico production was the largest of any state or region, as operators reported shut-ins resulting from freeze-offs. Well freeze-offs continued to affect production in western U.S. states in January 2013.
• EIA expects that natural gas consumption will average 70.0 Bcf/d in both 2013 and 2014. Forecasts for closer-to-average winter temperatures in 2013 and 2014 (compared with the record-warm temperatures in 2012) lead to increases in natural gas used for residential and commercial space heating. The projected increase in natural gas prices contributes to a decline in natural gas used for electric power generation from 25.0 Bcf/d in 2012 to 23.1 Bcf/d in 2013 and 22.7 Bcf/d in 2014.
• Projected natural gas marketed production increases from 69.1 Bcf/d in 2012 to 69.6 Bcf/d in 2013, and remains flat in 2014. Onshore production increases slightly over the forecast period, while GOM production declines. Natural gas pipeline gross imports, which have declined over the last five years, are projected to remain near their 2012 level over the forecast period. Liquefied natural gas (LNG) imports are expected to remain at minimal levels of less than 0.5 Bcf/d in both 2013 and 2014.
• As of March 1, 2013, working gas stocks totaled 2,083 Bcf, which is 361 Bcf less than at the same time in 2012, but 269 Bcf greater than the five-year (2008-12) average, according to EIA's Weekly Natural Gas Storage Report. EIA expects an end-of-March level of just under 2,000 Bcf, which is less than the unusually high 2,477 Bcf at the end of March 2012, but still well above the five-year average of 1,726 Bcf.
This week the EIA will release its inventory on its normal schedule and time... Thursday March 14th at 10:30 AM. This week I am projecting an average withdrawal of 120 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced an above normal level of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 66 BCF and the normal five year net withdrawal for the same week of 74 BCF. Bottom line the inventory deficit will widen modestly this week versus last year while the surplus will narrow compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be bullish when compared to the historical data and as of today the market seems to starting to price that outcome into the futures market.
If the actual EIA data is in line with my projections the year over year deficit will widen to about 482 BCF. The surplus versus the five year average for the same week will come in around 149 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a range of 90BCF to about a 150 BCF net withdrawal with the market consensus still forming.
I am maintaining my view at cautiously bullish as long as the spot contract remains above the $3.50/mmbtu level. 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 the entire complex to neutral as the oil complex appears to be putting in a short term bottom. I do not think the oil market trend has changed just yet (thus my neutral rating) but it is starting to show the signs of change and thus it is time to be on the alert.
Markets are mixed as shown in the following table.
Note: I am publishing Wednesday's report on Tuesday night due as I will be teaching a course starting early on Wednesday.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
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