For the first time in well over a week the spot Nat Gas contract was able to settle above the key $4/mmbtu technical resistance area. The market has been in the midst of a short covering rally since trading began on Monday. The majority of the upside move and breaching of the $4/mmbtu is mostly driven by a technical move as the overall fundamentals have not changed all that much over the last week or so. Technically the spot futures contract is now in a new higher trading range of $4/mmbtu on the support side and $4.16/mmbtu as the upper resistance level. I am still of the view that the market will need fundamentals support to sustain a move to the upside from current levels.
The short term fundamentals still do not look very supportive for higher levels of weather related Nat Gas demand. The latest NOAA six to ten day and eight to fourteen day forecasts are still showing a mostly neutral forecast through the end of May. There are pockets of above normal temperatures but nothing that looks like it will result in a strong period of Nat Gas heating related demand. In addition there are some pockets of above normal temperatures forecast with nothing that seems to suggest that there will be a strong call on Nat Gas for power generation to meet cooling demand.
The main fundamental support comes from the fact that total Nat Gas in inventory is strongly below last year at this time and mildly below the so called normal five year average for the same timeframe. That said with weekly injections likely to outperform the historical period there is a growing view that the gap between current inventory levels and the five year average should dissipate over the next month or so. However, in the meantime the market remains on alert that any unforeseen shut down like what occurred with the coal fired power plant in Georgia could result in a draw on Nat Gas inventories at a time when the level is still below normal.
Thus I do not see any strong fundamental support in the short term but at the moment the market sentiment is biased to the upside and prices may still move higher on a continuation of the technical move that began early in the week. This week the EIA will release its inventory on its normal schedule and time... Thursday May 16th at 10:30 AM.
This week I am projecting the fifth injection of the season of 95 BCF into 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 temperatures during the report period. My projection compares to last year's net injection of 56 BCF and the normal five year net injection for the same week of 83 BCF. Bottom line the inventory deficit will narrow this week versus last year and the more normal five year average if the actual numbers are in sync with my projections. This week's net injection will be neutral with a slight bias to the bearish side when compared to the historical data.
If the actual EIA data is in line with my projections the year over year deficit will come in at about 698 BCF. The deficit versus the five year average for the same week will narrow to around 87 BCF. The early market consensus is projecting the fifth injection of the season in the range of 85 BCF to 110 BCF with the consensus still forming.
The growing market concern over the weakening oil fundamental picture is continuing to pressure oil prices with the complex declining for the fourth trading session in a row. The fact that the US dollar index was also strong yesterday contributed to the selling in the oil pits. The rally in equity markets… normally a positive driver for oil prices… was largely ignored with the strong US dollar and prospects for weaker demand turning out to be the main negative price drivers for the complex.
It is interesting in that often times the market discounts the nearby oil fundamentals and tends to focus on the externals which normally present a forward or perceived view of the future fundamentals. However, over the last week or so the market has become much more focused on the current fundamental picture which is becoming more and more bearish. As I have been discussing in the newsletter supply is robust and growing, global oil demand is faltering and US inventories are at the highest level since the 1930's.
On the economic front Germany's economy expanded less than expected while France fell into recession for the first quarter. France's economy contracted 0.2 percent quarter on quarter for Q1 after a 0.2 percent decline in Q4. The Eurozone reported a decline of 0.2 percent on a quarter on quarter basis for Q1 versus a market consensus of 0.1 percent. Europe's economy continues to weaken suggesting that oil demand in the region will also weaken going forward.
Global equities rebounded over the last twenty four hours as measured by the EMI Global Equity Index. The Index is now about unchanged for the week with the year to date gain now at 2.3 percent. The rankings have remained the same with Japan and the US holding the top two spots while Brazil and China are at the bottom of the leader board… both in negative territory for 2013. Equities were a positive price driver or the oil complex but as discussed above other price drivers offset the equity/oil price relationship.
I am maintaining my view at neutral for Nat Gas but upgrading my bias to cautiously bullish as yesterday's price reversal and breaching of the upper range resistance level suggests higher prices could still be in the cards. The fundamentals remain neutral at best as most of the current move is technically driven.
I am maintaining my view of the entire complex at neutral. Global demand growth is still looking like it is turning to the downside. Brent & WTI both breached their range support levels suggesting further downside potential in the short term.
Markets are mixed as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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