For the third week in a row Nat Gas futures are staging a short covering rally ahead of the weekly Nat Gas inventory report. The market is also getting an assist from the round of cold temperatures experienced so far this week along major parts of the country. Whether or not the rally is going to hold through the inventory report is a big question since this week's inventory withdrawal will be below both last year and the five year average and thus a bearish report.
The five day outlook is projecting cold temperatures over major parts of the US which should result in above normal levels of Nat Gas related heating demand for next week's report. However, as we move to the NOAA six to ten day and eight to fourteen day forecasts the higher demand east coast is projected to experience above normal temperatures for the period February 24th through March 4th. That said the western two thirds of the country is still projected to experience below normal temperatures. Overall if the actual weather turns out to be in sync with the current projections I would expect a normal level of demand for Nat Gas.
Adding a bit of support in the near term the level of nuclear outages is still above normal which should result in additional Nat Gas related demand for power generation. Currently 15,300 MW of nuclear capacity is shut-down versus 12,000 MW last year and 9,800 versus the more normal five year average. Not a major factor but slightly bullish nevertheless.
From a technical perspective the spot Nat Gas futures contract has once again moved back into the $3.20/mmbtu to $3.50/mmbtu trading range that has been mostly in play going back to November of 2012. Since the market failed to stay below the $3.20 level I would say the very short term momentum has shifted to being more biased to an upside... assuming this week's inventory report does not make the new long side entries very uncomfortable. I would assume today's rally is mostly driven by short covering with some new entries from the long side as the latest CFTC Commitment of Traders Report showed Nat Gas specs cut their net long position by 7,754 contracts... but still remain long about 136,402 contracts.
This week the EIA will release its inventory on its normal schedule and time... Thursday February 14th at 10:30 AM. This week I am projecting an average withdrawal of 120 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a below normal level of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 155 BCF and the normal five year net withdrawal for the same week of 140 BCF. Bottom line the inventory deficit will narrow modestly this week versus last year and compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will bearish when compared to the historical data but as of today the market seems to have discounted this event.
If the actual EIA data is in line with my projections the year over year deficit will narrow to about 236 BCF. The surplus versus the five year average for the same week will come in around 368 BCF. This will be a bearish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a range of 115 BCF to about a 130 BCF net withdrawal with the market consensus still forming.
Oil prices are starting the shortened trading week in negative territory with the including the Nymex RBOB contract. At the moment the spot WTI contract is the weakest oil commodity in the complex failing to breach the $98.40/bbl upper resistance twice in the last two weeks. WTI is now trading very near the lower range support area of about $95/bbl which has held up on numerous occasions going back to the third week of January. For now WTI is range bound with a bearish bias. The $95/bbl support is a very key technical level that looks like it could be challenged once again in the very short term. The March WTI contract expires tomorrow.
The spot Brent contract has also moved to a bearish bias after breaching its key $118/bbl support level late last week. From a technical perspective Brent does not have a lot of support until reaching the $115/bbl level which could be tested in the short term. The spot Brent contract has been under pressure since Shell & BP changed the contract pricing basis for BFOE(Brent, Forties, Oseberg, Ekofisk) trading. Shell announced last week it would apply a quality premium for forward contracts from May onwards in the physical crude oil market on which Brent futures are based. BP has backed the Shell move. Shell's changes would incentivize market participants to deliver the full range of crudes eligible under forward contracts for the BFOE portfolio by allowing them to adjust prices to reflect differing quality. This should provide more liquidity in the BFOE market.
The spot Nymex HO contract is drifting lower but has been trading in a very tight range over the last week or so of between $3.23/gallon to $3.19/gal. However, that range was breached to the downside. HO has been and continues to be more influenced by the direction of the spot Brent crude oil market rather than WTI and as discussed above Brent is also drifting lower.
The main outlier of the oil complex has been the spot RBOB gasoline contract which has remained in a strong uptrend going back to the middle of January. Needless to say the market is very overbought and susceptible a strong round of profit taking selling at any time. The upward momentum seems to be slowly losing some of its energy and could be signaling that the market is now at the point of looking for one or two catalysts to initiate a round of profit taking selling. From a fundamental view there is no shortage of gasoline with total US inventories modestly above both last year and the five year average for the same week.
However, market participants are more focused on the forward fundamental view that there could be supply issues heading into the upcoming summer driving season as the spring maintenance season gets under way and Hess readies to shutter its Port Reading refinery at the end of the month. That all said the US is still exporting about 500,000 bpd of gasoline from the US Gulf that could be available to make up any internal issues especially with the Colonial Pipeline expansion to the East coming near an end. Also the arb window from Europe and Asia (to the West Coast) is open suggesting that cargoes will be flowing to the US. Thus I raise the caution flag and strongly suggest that you use tight, trailing stops on any exiting RBOB long positions.
I am upgrading my Nat Gas view and bias neutral as the weather forecasts and nearby temperatures are supportive. 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 WTI at neutral to cautiously bearish and maintaining my view for Brent at neutral to 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... a round of profit taking selling. Furthermore the spot Brent contract has breached its technical resistance level of about $118/bbl suggesting lower prices 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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