The spot futures contract settled above the $3.50/mmbtu resistance level on Monday for the first time since the second half of January. Last time the market settled above the upper range level it remained above resistance (now support) for three trading sessions before falling strongly and moving back inside the range. Thus with a lot less winter left now than the last time it broke out to the upside I would like to see prices remain above the $3.50/mmbtu level for several more days before declaring that the break out is for real this time.
All of the above said the market is clearly trading as if it wants to work higher and as such the new levels are $3.50/mmbtu for support with the next upside resistance level around $3.66/mmbtu. The market has moved higher eight out of the last eleven trading days and barring any negative surprises from this week's inventory report the market sentiment is likely to push prices possibly up to the next resistance area. I am adjusting my view to cautiously bullish as long as the spot contract remains above the $3.50/mmbtu level.
The latest NOAA temperature forecasts are mixed but still mostly supportive. The shorter term six to ten day forecast show some moderation in temperatures to more normal levels along most of the eastern part of the US while the eight to fourteen day forecast is projecting a return to colder than normal temperatures along most of the US. Remember this is the end of the winter season and cold temps this time of the year are not nearly as severe as in the heart of the winter heating season (Jan/Feb). So yes the inventory withdrawals are looking like they will be larger than last year and the more normal five year average into the third week of March. However, it will then be spring and temperatures are likely to continue to moderate as we enter the lower demand shoulder season.
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 160 BCF net withdrawal with the market consensus still forming.
Oil prices are recovering in overnight trading after starting the trading week dominated by selling. The oil complex has been under pressure since the whole complex technically breached their respective support levels and entered into a short term downtrend. RBOB gasoline is the only commodity in the complex that has not declined as much as the rest of the other commodities indicating that there is still some underlying support as the refinery sector approaches the main part of the refinery maintenance season.
The gains in the complex overnight are mostly driven by Brent as the Brent pipeline system remains closed for the third day in a row after a leak was discovered on March 2 on the Cormorant Alpha platform according to the operator of the platform. At the moment the reaction to the pipeline problem in the North Sea is not resulting in a major strengthening of oil prices rather the reaction has been relatively muted with prices for both Brent and WTI actually declining yesterday.
I view the gains so far this morning as more short covering off of the pipeline news rather than any surge of new buying interest coming into the market. The spot Brent contract is also finding some light support as the technical support level of around $109.50/bbl has now held for the third trading session in a row. In addition the spot WTI contract breached and failed to stay below the psychological support level of $90/bbl ($88 to $89/bbl is a firmer technical support area) slightly improving the current negative market sentiment . At the moment I cannot say with any degree of confidence that today's moves are definitely a directional change in the underlying trend. For now I still view the price move in the oil complex as a short covering rally in a downward trend. Certainly if the situation in the North Sea remains an issue for an extended period of time higher prices would follow.
The economic data out of Europe this morning is biased to the positive side pushing equity markets to over four year highs. The EU services PMI declined less than estimated but it did come in lower than January's number. In addition EU retail sales actually increased in January by 1.2% percent versus December's 0.8 percent decline. A sign that the consumer is starting to spend again. In the UK the services PMI actually increased in February to 51.8 versus the consensus estimate of 51.
In China the government kept it growth target unchanged at 7.5 percent for 2013 as the new government will follow the current policy of moderate growth rather than looking for the double digit growth rates seen earlier in the decade. The government also cut its inflation target from 4 percent to 3.5 percent suggesting the government has less tolerance for inflation led price surges. The new leader takes charge at the end of the country's annual parliament meeting which began today. I view the targets as having been set with a view that the likelihood of achieving them is very high and thus helping the new leader to start his tenure on a positive note.
I am upgrading my Nat Gas view to cautiously bullish for as long as the market remians 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 at 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... another round of profit taking selling as we experienced yesterday.
Markets are higher as shown in the following table.
Dominick A. Chirichella
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