The Nat Gas futures market is holding the gains from last Friday's rally and actually adding to them. The spot contract has been hovering either side of the new resistance area of $4.16/mmbtu with no decisive move much above it as of this writing. The cash market is following the futures contract with most cash prices higher so far today. The Georgia Power coal plant shut down has been the main catalyst for the rally since late Thursday evening. In fact even with an upside miss in last week's EIA inventory report the May futures contract was settling into a lower trading range until the coal shutdown hit the media airwaves. It was this event that quickly pushed prices back above the $4/mmbtu level with the market settling well above this resistance level on Friday.
The main sentiment driver is the fact that the Nat Gas market is now exposed to any infrastructure shut downs that could result in an increase in Nat Gas demand… like the Georgia Power coal plant shut down. With total Nat Gas inventories now below the so called normal level as measured by the five year average market participants are likely to react quickly to any unforeseen increase in consumption and/or a loss of supply. The Nat Gas market has moved from an oversupply driven market that has been in play for over a year to a demand driven market as supply and demand are slightly out of balance at the moment.
Another Wall Street company upped their forecast for Nat Gas prices for 2013. Morgan Stanley raised their estimate to $4/mmbtu for the year joining Goldman Sacs who upgraded their view on Friday. In my view the key to how the price of Nat Gas performs going forward will be based more on the demand side of the equation. If the summer cooling season gets an early start and results in above normal level of Nat Gas related cooling demand the price of Nat Gas will remain firm… at least through the first half of the injection season. I think supply will remain at least at last year's level if not a tad higher as rig counts are likely to shift more toward Nat Gas as long as prices remain above the $4/mmbtu level.
This week the EIA will release its inventory on its normal schedule and time... Thursday April 11th at 10:30 AM. This week I am projecting an average withdrawal of 15 BCF from inventory and the last withdrawal of the season. 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 injection of 11 BCF and the normal five year net injection for the same week of 15 BCF. Bottom line the inventory deficit will widen this week versus last year as will the deficit compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be supportive when compared to the historical data.
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If the actual EIA data is in line with my projections the year over year deficit will widen to about 751 BCF. The deficit versus the five year average for the same week will come in around 47 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 -10 BCF to about a 50 BCF net withdrawal with the market consensus still forming.
The oil complex is starting the week in positive territory after a week of strong losses. In fact WTI experienced the largest weekly loss in six months while the Brent/WTI spread narrowed to the lowest level since June of last year. It is much too early to say if the oil complex is in the early stages of a bottoming pattern or just a mild short covering rally.
Last week the macroeconomic data was biased to the bearish side especially the huge miss in the US nonfarm payroll number which showed only 88,000 new jobs created versus an expectation for a gain of about 190,000 jobs. The headline unemployment number dropped to 7.6 percent. The unemployment rate is not very meaningful as the reduction was not a result of new jobs created rather it was due to another significant reduction in the participation rate. People continue to leave the job market and give up looking for a new job.
Over the weekend the latest round of talks between Iran and the West ended with basically no progress with both sides far apart on substance. At the moment there was no announcement by either side as to another round of talks which seems to be the pattern that has happened several times since the talks began years ago. As I suggested in last week's newsletter I did not see any motivation for Iran to give up a whole lot at this time as the West is in the midst of a potentially larger issue with North Korea. The outcome of the talks is a neutral to even slightly bullish outcome for oil prices as it does mean that the sanctions will not be eased anytime soon and the potential for new sanctions may be on the horizon.
I am maintaining my view to cautiously bullish for Nat Gas even as the forecasted weather pattern still appears to be a negative for heating related Nat Gas demand. The shutdown of Georgia Power's coal plant highlights the exposure that currently exists with Nat Gas inventories as slightly below normal levels. From a technical perspective the market has once again broken out to the upside and with a few settlements above the $4 to $4.02 level will certainly result in a test of the next upside resistance level from September of 2011 of around $4.16/mmbtu. Basis the activity on Friday and the evolving fundamental situation I am upgrading my view and bias back to cautiously bullish but with a caution that all should use tight, trailing stops as the situation can change very quickly.
Markets are mostly higher ahead of the US trading session as shown in the I am maintaining my view of the entire complex at neutral across the board but with a cautiously bearish bias as inventories are starting to build and jeopardizing the technical bottoms that have been put in place in the complex over the last several weeks. WTI has now breached its range support level as has Brent and refined products. The complex is now showing signs that the next move could be a continuation to the downside. Markets are mixed as shown in the following table.
Dominick Best regards,
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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