Currently Nat Gas futures are struggling to stay above the key technical breakout level of $3.50/mmbtu. As of this writing the futures price is now marginally below the $3.50 level and acting much as it did during the breakout in the second half of January. The way the market is trading and even if we do get a settlement above the $3.50/mmbtu level I am moving my view back to neutral until the market sorts out which way it truly wants to head. This week's inventory repot will be bullish but we are simply running out of winter and quickly approaching the lower demand shoulder season.
Also keep in mind that as we enter the shoulder season the market is not likely to get the uplift it got last year as prices were at a multiyear lows and the economic advantage of switching from coal to Nat Gas resulted in a significant increase in Nat Gas related demand for power generation. Currently with coal prices falling the economic advantage is still clearly toward coal and has been since the fourth quarter of last year. As such the market is not going to get the bump up in demand it got last year with the upcoming injections season likely to get off to a strong start.
In addition, the late spring and early summer cooling season also got off to a strong start last year for Nat Gas related demand to meet above normal levels of cooling demand. It is too early to say with any degree of confidence as to what the early cooling season weather will be like but it is definitely another exposure area for Nat Gas prices if the weather is not strongly warmer than normal this year.
I view the potential headwinds discussed above as the main reason traders and investors are only cautiously approaching the market based on tomorrows projected bullish inventory report and the current round of colder than normal temperatures.
In the area of longer term potential impact on Nat Gas demand Berkshire owned BNSF Railway... a very large consumer of diesel fuel plans to test this year using Nat Gas to power its locomotives. With the growing differential between diesel fuel and Nat Gas the economic advantage of switching is looking favorable. This could be an inserting outcome that if functionally and economically successful could motivate other rail and truck carriers to move in the same direction. From a US energy independence viewpoint it would certainly be a much better utilization of Nat Gas rather than exporting it to competitors of the US.
This week the EIA will release its inventory on its normal schedule and time... Thursday March 7th at 10:30 AM. This week I am projecting an average withdrawal of 140 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 92 BCF and the normal five year net withdrawal for the same week of 107 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 356 BCF. The surplus versus the five year average for the same week will come in around 275 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 120 BCF to about a 147 BCF net withdrawal with the Reuter's market consensus looking for a net withdrawal of 134 BCF.
Even as equity markets in the US hit new all time high levels trading activity in the oil complex was muted with limited price gains that were almost entirely driven by a light round of short covering. The relatively balanced global fundamental situation has been keep oil prices under control as the market has been in a short term downward trading channel since breaking through key technical support levels in the middle of February. Even the growing list of geopolitical events that would have normally sent oil prices to higher levels has been mostly ignored by market participants.
Both the spot WTI and Brent contracts are in a slowly evolving technical bottoming pattern with both contracts still below key resistance levels, However, both have held above support levels for the last three or four trading sessions. On the other hand heating oil actually rose strongly and is now trading above its resistance level indicating that this commodity has put in a short term bottom and is likely to move higher. RBOB gasoline has also been going through a bottoming pattern and is currently trading around its resistance level. Overall the oil complex may have put in the lows for the current downward move.
On the geopolitical front there has been a lot of rhetoric and tough talk coming from the US and Israel regarding Iran's nuclear program. Israel has said Iran has crossed the line in its program and is taking advantage of the talks with the west to continue to progress closer to its goal of nuclear weapons. Both Secretary Kerry and Vice President Biden clearly stated over the last several days that the military option is on the table and the US would continue to do what it had to do to prevent a nuclear Iran. Even former Secretary of State Kissinger said a nuclear crisis around Iran is getting closer. The geopolitical risk to the oil producing regions of the Middle East is moving back into the foreground and if the rhetoric and tough talk continues market participants are once again going to start to add to the risk premium in the price of oil.
Yesterday Venezuelan President Hugo Chavez succumbed to his two year fight with cancer. Venezuela is now on the radar as the transition to a new election and thus a new leader could create instability and uncertainty over the next several months. The current vice president is the current front runner with the opposition party likely to make a strong run in the upcoming election. The military and police have been put on alert. The government leaders continue to view external forces as a potential cause of instability and yesterday they expelled two US diplomats accusing them of spying.
Although Venezuela is not as large an exporter of oil as it was back in 2002 during the attempted coup it is still a factor and any interruption in oil supply will result in a short term upward move in oil prices. We need to watch what evolves over the next month or so.
The macroeconomic data out both China and Europe were mostly positive yesterday and pushed global equity prices higher with both Europe and the US hitting all time high levels. Global equities have been a supportive price driver for oil prices but as I mentioned above oil has not reacted very strongly to the equity rallies over the last several days.
In contrast to yesterday's positive data out of Europe today's release of fourth quarter EU GDP data showed Europe slipped deeper into recession compared to just the third quarter. GDP declined by 0.6 percent in Q4 and 0.9 percent for the year. Germany and France also saw a larger contraction in Q4 with Germany's construction PMI coming in at 43.8 for February compared to 47.7 in January for the eleventh month of declines in a row.
It is still difficult to get too excited about any major economic recovery in the EU just yet. Tomorrow the ECB meets with most market participants expecting a status quo outcome keeping short term interest rates at current levels. With the EU continuing to contract I would expect the ECB to lower short term rates sometime soon if not at this week's meeting. Even though European equities are now at 4 1/2 year highs the economy is not growing and thus oil demand is not growing either in Europe thus contributing to the muted reaction we have seen in oil prices during the most recent run-up in equity values.
Today the ever important monthly jobs data cycles gets underway in the US with the release of the ADP private sector jobs report followed by the weekly initial jobless claims tomorrow and the main event on Friday... nonfarm payroll data and headline unemployment number. The market is expecting a modest increase in jobs on Friday of about 170,000 new jobs with the unemployment rate holding steady at 7.9%.
The US employment situation has taken on an elevated level of importance by the market as the US Fed has linked much it its monetary policy... including their massive money printing operations to the state of the jobs market in the US. Any sign that the jobs situation is improving at a faster pace than the market is currently forecasting would likely be interpreted by market participants that the Fed might potentially end its quantitative easing program sooner than originally expected. If so the US dollar would rise and oil and most other commodity prices would likely decline further from current levels.
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 upgrading 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 lower as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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