The Nat Gas market blew through two resistance areas last week after yet another bullish weekly EIA inventory report. Colder than normal temperatures have continued to result in an atypical high level of Nat Gas heating related demand. With colder than normal temperatures forecast for the eastern two-thirds of the US through the end of March there is still going to be atypical net withdrawals from inventory through the aforementioned time period. This is going to result in the deficit versus last year continuing to grow through March while the surplus versus the five year average will continue to narrow (see EIA projections for winter ending inventory levels).
As has been the case all winter Nat Gas does not pay much attention to all of the external noise and has not been impacted by the all around selling in equities and most commodity markets due to the Cyprus deal. Instead Nat Gas futures are up by 1.2 percent as the market gets underway on Sunday night. In fact the spot Nat Gas futures contract is continuing to inch closer to the psychological $4/mmbtu level which seems almost a certain to be tested during the first half of the trading week.
The U.S. Energy Information Administration (EIA) projects working inventories of natural gas in storage will end the heating season at levels significantly lower than last year. This month's Short-Term Energy Outlook projects that at the end of March, inventories will total 1,959 billion cubic feet (Bcf), which is lower than last year's record high level but still greater than recent years. Last year at the end of March working inventories totaled 2,477 Bcf, which was the result of robust natural gas production combined with low demand from a warm winter. For much of this winter heating season, inventories have remained greater than the five-year ( 2008-2012) average and below the previous year's levels.
EIA expects that total net additions to inventories over the 2013 summer injection season (April 1 to October 31) will total 1,961 Bcf. In the past 5 years, the overall net additions to working gas in storage during the injection season have averaged 2,032 Bcf. Due to the high end of winter inventories last year, net injections during the 2012 summer season only totaled 1,453 Bcf.
In the EIA weekly Nat Gas report estimates from BENTEK Energy Services LLC (Bentek), average natural gas consumption for the nation fell this report week by 11.5 percent over last week's daily average. Natural gas consumption decreased in all sectors and most notably in the residential/commercial and power sectors, which fell by 15.7 and 12.7 percent, respectively, for the report week. This is the result of warmer weather in most parts of the country compared with the previous week.
Bentek estimates that the average daily natural gas supply for this report week increased modestly by 0.5 percent over the previous week's daily average. Dry natural gas production and imports from Canada increased by 0.4 percent and 3.3 percent, respectively, from the previous week.
This week the EIA will release its inventory on its normal schedule and time... Thursday March 21th at 10:30 AM. This week I am projecting an average withdrawal of 62 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest level of above normal Nat Gas heating related demand. My projection compares to last year's net withdrawal of 0 BCF and the normal five year net withdrawal for the same week of 26 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 the open on Sunday night 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 568 BCF. The surplus versus the five year average for the same week will come in around 63 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 50 BCF to about a 70 BCF net withdrawal with the market consensus still forming.
The big event over the weekend that could potentially have an impact on the short term direction of most of the external market price drivers was the very surprising bailout deal conditions imposed on Cyprus. In a change from previous bailout deals the EU and IMF want Cyprus bank depositors to take up to a 9.9 percent hit on their savings in return for the 10 billion euro aid package. The deal announced in the early morning hours on Saturday send many people to get as much cash as they could out of the banks via ATM as the banks were closed and electron transfers were blocked.
The deal has to be approved by the parliament. According to the President if it fails Cyprus's two largest banks will collapse. So the story is far from over as the Parliament does not vote until Monday. Having the bank depositors take a hit on their savings has not been a condition in any other EU bailout. However, the EU said it was the only way to salvage Cyprus's financial sector. They also said it would not set a precedent. As of Sunday night's open in the US it would seem the market does not believe that last statement as traders and investors have come out with mostly nothing other than sell orders. Equities and most commodities re lower while gold and bonds are higher as cash looks for a short term safe haven.
An important week on the economic front with a modestly active calendar of macroeconomic indicators with the big event in the US this week coming mid-week when the US Central bank FOMC committee meets. The market will be parsing every word of the outcome announcement on Wednesday to see if there is any sign that the Fed's appetite for its massive quantitative easing program is changing in anyway after the better than expected jobs data reported for the month of February. The Fed and Chairman Bernanke have continued to say they would maintain a very accommodative monetary policy as long as the unemployment rate remains above 6.5 percent (currently at 7.7 percent) and inflation remains below 2 percent. Last week the CPI came in higher than expected but still at 0.7 percent and below the threshold. I do not expect anything other than status quo from the FOMC this week.
I am maintaining my view at cautiously bullish as long as the spot contract remains above the $3.75/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: Due to my travel this week I am publishing Monday's report on Sunday night.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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