Nat Gas is staging a strong upward move on the first day that the March Nymex contract is in the spot position. I do not see this as a trend change by any means rather I view today's move as a short covering rally ahead of what should be a bullish EIA inventory report tomorrow morning (see below for a more detailed discussion on inventories). All of the other factors that have driven Nat Gas prices lower for the last six trading sessions have not changed and remain biased to the bearish side. The fundamentals remains bearish as well as the current and projected temperature forecasts for the high demand eastern half of the US.
The current temperatures are very warm in many locations along the northeast corridor and the latest NOAA six to ten day and eight to fourteen day forecasts are both calling for mostly above normal temperatures from February 4th through the 12th. Although this week's EIA inventory report will likely show a net withdrawal modestly above both last year and the more normal five year average for the same week the inventory reports reflective of the aforementioned time period of the temperature forecasts will underperform versus history.
From a technical perspective the current price level of the spot March futures contract is still within the $3.20/mmbtu to $3.50/mmbtu trading range that has been in play since the first half of December and at the moment I do not see any technical (or fundamental) reason as to why the market is going to break out of the range to the upside anytime soon. I still would say the odds are in favor of a breakout to the lower end unless the weather become very winter like over a major portion of the US for a sustained period of time. Right now none of the forecasts are suggesting that type of weather scenario.
This week the EIA will release its inventory on its normal schedule and time... Thursday January 31th at 10:30 AM. This week I am projecting an average withdrawal of 200 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 149 BCF and the normal five year net withdrawal for the same week of 178 BCF. Bottom line the inventory surplus will narrow modestly this week versus last year and 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 and versus 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 208 BCF. The surplus versus the five year average for the same week will come in around 298 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a range of 195 BCF to about a 230 BCF net withdrawal with the Reuters consensus looking for net withdrawal of 206 BCF.
The main economic event of the day will be the outcome of the US Fed FOMC meeting with the focus mostly on the statement as most in the market expects a rollover of existing accommodative policies. The announcement will be released at 2:15 PM EST as there is no press conference by the Chairman this month. There is a growing view around the markets and by many economists that the Fed could begin to look for an exit point for their very accommodative monetary policy sooner than originally anticipated. That said as of the last meeting the Fed has clearly tied their easing policies to the unemployment rate suggesting that they would not change until the unemployment rate drops to below 6.5%. It is currently at 7.8% but the economy seems to be picking up its recovery pace a tad. Of interest Fed Chairman Bernanke does not expect the unemployment rate to drop below 6.5% until 2015.
I do not expect the Fed to signal any changes but they are likely to make a comment that the US economic recovery is improving. Some in the market may interpret that as a sign that tightening could come earlier than expected. We will have to see how the market reacts this afternoon especially since the equity markets are trading near multi year highs and remain in an overbought mode and susceptible to a round of profit taking selling.
The Fed meeting is not the only economic data point to hit the airwaves today. In Europe EU economic confidence data has already been released and it came in better than the previous month as well as higher than the expectations. EU business, consumer & economic confidence and industrial sentiment all improved in January versus December's data points. Another sign that the sluggish EU economy may be in the early stages of forming a turning point. The euro is also trading above the 1.35 level or the highest level since the end of 2011 a sign that the debt crisis may finally be in the background in Europe.
In the US the fourth quarter GDP was a big surprise today coming in at a negative 0.1% versus the market consensus for a gain of 1.1%. This compares to Q3 GDP of 3.1%. This has not had a major impact on the market with the equity markets modestly lower ahead of the FOMC meeting announcement. In addition the employment data cycle began today with the release of the ADP private sector report which came in better than expected showing about 192,000 new private sector jobs were created in January versus an expectation for 175,000. Mixed results and thus mixed impact on the markets so far.
Oil prices have been slowly continuing to evolve in the uptrend that has been in play since bottoming in the middle of December. The spot Nymex WTI contract has breached the upward trending channel resistance level and from a technical perspective now has a clear path to the next resistance level of around the $100/bbl area. The spot Brent contract has also cleared its last technical resistance area of $114/bbl setting the stage for a test of the next resistance level of around $118/bbl. There is some minor resistance around the $116/bbl level that could serve to slow the upward advance... assuming the upward advance continues.
I am moving my Nat Gas view and bias to cautiously bearish as the weather forecasts and nearby temperatures remain bearish. 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 mixed as shown in the following table
Dominick A. Chirichella
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*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.