Gas market was hit with an expected round of profit taking selling. The selling was modest and the downward move in prices was also modest losing about $0.13/mmbtu on the session or 3.6%. The spot futures contract has now moved back into the $3.33/mmbtu to $3.55/mmbtu trading range. However. the spot futures price is still above the $3.48/mmbtu support area from the inverted head and shoulders pattern breakout from about a week or so ago.. Thus for the moment the technicals are still a positive for the futures market and should remain so unless the market breaches the $3.33/mmbtu level.

On the fundamental front there is still a considerable amount of nuclear plants down for maintenance resulting in a pull on Nat Gas for power generation. However, the level of outages is consistent with the same period from last year as well as the five year average for the same week. On the coal switching front at the current elevated price levels for Nat Gas the macro economics have been favoring coal for well over a month. The amount of Nat Gas that is being burned to generate power in place of coal has declined considerably since peaking in the middle of the year.

The latest NOAA six to ten day and eight to fourteen day forecasts are both much less bullish than the forecasts were about a week or so ago. The majority of the US is now forecast to experience above normal temperatures for the period October 21 to the end of the month especially the Nat Gas intensive heating regions of the mid west and the northeast. Nat Gas heating demand is heading for a lull after an early winter burst.

The last several injection reports of the season are likely to increase closer to last year's levels and even possibly exceed them. As I have pointed out the surplus in inventory has declined significantly throughout the injection season but with warmer weather now in the picture the surplus could widen a bit before the end of the season. However, I am still expecting the ending inventory level to be only about 2% higher than last year. With a more normal winter season expected demand should be about 20% greater than last year thus limiting the downside risk in prices... as long as the winter turns out to be as projected.

This week the EIA will release the weekly Nat Gas inventory report on its normal schedule... Thursday October 18 at 10:30 AM. This week I am projecting a 55 BCF net injection into inventory. My projection for this week is shown in the following table and is based on a week that experienced minimal Nat Gas cooling related demand but a fair amount of heating related demand from the cold front that has passed across the upper mid west and along parts of the east coast My projection compares to last year's net injection of 106 BCF and the normal five year net injection for the same week of 71 BCF. Bottom line the inventory surplus will narrow modestly this week versus last year and versus the five year average if the actual numbers are in sync with my projections. This week's injection will be at 52% of last year and 77% of the five year average for the same week if the actual outcome is in sync with my forecast. For interest the average for the injection season to date has been around 71.5% of last year.

If the actual EIA data is in line with my projections the year over year surplus will narrow to around 219 BCF. The surplus versus the five year average for the same week will widen to around 252 BCF. This will be another bullish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a wide range of the low 30's to the mid 60's with the consensus starting to form around 60 BCF.

Another wide trading range session with WTI dropping below the $90/bbl level on concerns about the slowing economy only to recovery the majority of its earlier day losses on better than expected US economic data and growing geopolitical concerns. As has been the case for about a month the oil price battle continues with the main headwind still the slowing global economy. Last week several agencies highlighted the negative impact on global oil demand growth from the slowing of the global economy. On the tailwind side of the equation the combination of the evolving geopolitical situation in the middle east... especially around Iran's nuclear program coupled with the regional imbalances in refined products as well as the perception that the quantitative easing programs will eventually result in an inflation surge in oil and commodity prices (so far the inflation surge has not been the case).

As bad as the global economy was looking last week so far this week there have been a few bright spots from both China and the US. Out of China (starting over the weekend) exports came in better than expected and lending figures were also positive. In addition many analysts are expecting both industrial and investment data due out later in the week to also be positive. Possibly China may be stabilizing and if one extrapolates the export growth data it could be an early sign that China's main export markets... US and Europe may also be starting to stabilize. From an oil perspective any sign that the Chinese economy is bottoming out is a direct signal that oil demand growth will start to grow at a faster pace than it has been growing over the last year or so.

On the geopolitical front mixed signals over the last few days. On the bullish for oil side of the equation an article in a German magazine over the weekend revealed a plan by Iran to block the Straits of Hormuz by creating a massive oil spill which provided a bit of support to oil prices. However, on the other hand there were indications today that Iran might be willing to come to the negotiating table if the West guaranteed a supply of 20% enriched uranium to Iran for peaceful use in the country and if so then Iran would limit their own enrichment program. A positive sign and thus bearish for oil. So for today the Straits story seemed to override the negotiating story for the moment. As I have been saying for weeks I think eventually the Iranians will come to the negotiating table and agree to a plan that eases the concerns of the west while allowing the Iranians not to lose "face". I still believe that the geopolitical support for oil prices will drift lower as the likelihood of any military intervention by the Israeli's is in the background and not likely until next year at the earliest (if at all).

I am keeping my Nat Gas price view at neutral with bias to the bullish side as the fundamentals and technicals are quickly catching up the current price levels. As I mentioned above the market appears to be moving into a buy the dip mode.

The oil complex has breached all of its current support levels and as such I am keeping my view at neutral for today as crude oil continues to trade within a wide trading range (see above for more comments). The battle continues between the negativity from the slowing of the global economy compared to what global stimulus programs might do to the economy going forward while geopolitics has continued to remain an issue for market participants.

Markets are modestly higher heading into the US trading session as shown in the following table.

Best regards,
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy

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