The Nat Gas market has been in positive territory throughout the trading session so far primarily based on the forecast. The latest NOAA sox to ten day and eight to fourteen day forecasts are both projecting below normal temperatures across the eastern half of the US or the high Nat Gas heating demand part of the country. Under normal circumstances the current forecast would likely have been met with a much stronger round of buying. However, with the nearby weather very unseasonably warm market participants are still a bit skeptical.
In spite of last week's strong inventory withdrawal there is still an above normal amount of Nat Gas in inventory with more than half of the winter heating season now in the history books. This week's inventory report is likely to come in near the five year average but greater than last year while next week's report could underperform even further as temperatures have been very mild over the last week or so along the east coast.
From a technical perspective the spot Nat Gas futures contract has now moved into the $3.20 to $3.50/mmbtu trading range with the likelihood of testing the psychological $3/mmbtu support level a low probability event... unless of course the weather forecasts switch back to above normal.
This week the EIA will release its inventory on its normal schedule and time...Thursday January 17th at 10:30 AM. This week I am projecting an average withdrawal of 145 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced only a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 89 BCF and the normal five year net withdrawal for the same week of 144 BCF. Bottom line the inventory surplus will narrow week versus last year and hold steady 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 at about the small level as 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 143 BCF. The surplus versus the five year average for the same week will come in around 318 BCF. This will be a neutral weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a wide range of 100 BCF to about a 150 BCF net withdrawal with the consensus still forming.
The energy complex is starting the week in positive territory even as the latest euro zone manufacturing data for November was surprisingly disappointing. November EU industrial output declined by 0.3% compared to October which was down by 1%. The market was forecasting a return to growth in November. Although there have been many positive global macroeconomic data points released over the last several months Europe is still struggling in recession while both the US and China are growing but still at a slower than normal pace.
The Seaway pipeline has now restarted at an increased level of 400,000 bpd from 150,000 bpd. Crude oil inventories in Cushing and PADD 2 are at all time highs and even with a higher rate of pumping from Cushing to Texas it is going to take a considerable amount of time before inventories in the mid-west region of the US come anywhere near normal operating levels. The Brent/WTI spread will also take a long time before it approaches historically normal levels. I expect Brent to trade at a premium to WTI well into 2014. I believe the main outcome of the expanded Seaway capacity will be to put a cap on the Brent/WTI spread with the spread slowly narrowing as more capacity from other pipelines come on stream over the next year or so.
I am upgrading my Nat Gas view to neutral with an eye toward the upside if we get further follow through buying and supportive weather forecasts. I now anticipate that the market is less likely to test the $3/mmbtu support level if the actual temperatures are in sync with the latest NOAA forecasts. 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.
I am maintaining my view at neutral and moving my bias also at neutral as the current fundamentals are still biased to the bearish side. However, the technicals are now suggesting that the market may be setting up for a breakout move to the upside as both WTI and Brent are hovering near the channel upside breakout level. There is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East is continuing to slowly recede from the price of oil.
Markets are mostly lower except for Nat Gas as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
*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.