Profit taking selling continued in the Nat Gas market on Tuesday with the spot futures prices falling another 1.4% and now solidly breaching the inverted head and shoulders support level suggesting that this bullish technical pattern may not be ready for a move to the upside just yet. The market is now clearly in a trading range of $3.55/mmbtu on the high side to $3.33/mmbtu on the low side. At the moment the current sentiment suggests that the market may make a pass at testing the lower end of the trading range in the short term. From a technical perspective I would now categorize this market as neutral with a short term bias to the downside. If the lower range support level holds the futures price will be well positioned to make another pass at the inverted head and shoulders breakout level. That said the current weather fundamentals do not support that view.

The latest NOAA six to ten day and eight to fourteen day forecasts continue to project a bearish scenario for Nat Gas heating related demand through the end of the month. Both forecasts are projecting above normal temperatures across the eastern two-thirds of the country. The short term forecast is starting to fall in line with the 90 day forecast released by NOAA on September 20th which projected above normal temperatures across the majority of the US through the end of the year.

If in fact the temperature profile of major portions of the US follows along the lines of the aforementioned forecasts the weekly injections for the rest of the season are likely to increase above the current levels and start to approach both last year's level and the five year average injection for the same week. Based on the temperature forecast this week's injection (my projection around 55 BCF, market consensus about 50 BCF see below for more details) could be the last major underperformance in the injection rate and thus the last week of the injection season that the inventory surplus narrows. I would currently categorize the short term fundamentals as neutral to a bias to the bearish side for the rest of the injection season.

At the moment Nat Gas prices will be primarily driven by the outcome of the short to medium term weather forecasts and thus the actual weather outcome. We are in the time of the year when coal to Nat Gas switching and the tropical storm season are moving into the background as price drivers with the temperature forecasts taking full control of the market sentiment. As discussed above the weather forecasts are now suggesting a period of warmer temperatures and thus lower heating demand. Until there is a decided shift in the temperatures Nat Gas prices (both futures and cash) are going to have a difficult time in making another run to the upside. With the winter forecast calling for the cold weather not setting in until the second half of the winter heating season it is not likely that prices will collapse completely unless that part of the forecast also begins to change.

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 30 BCF to the 70 BCF with the consensus starting to form around 50 BCF.

A sprinkle of optimism coming from Europe coupled with some early corporate earnings reports that came in better than expected was enough to send the equity markets into a decent one day rally that spread to the oil sector and other key commodity sectors. Comments out of Germany suggesting that they may ease their objection or resistance to a Spanish bailout sent a message to the market that the EU Ministers meeting on Thursday and Friday could now make progress in taking another step in solving the EU sovereign debt issues. In addition the better than expected earnings from Goldman and several other early reporters helped push most all risk asset market higher as market participants regained a bit of confidence that the economy may be starting to stabilize.

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.

Due to my travel on Thursday I will be unable to publish Thursday' newsletter. Normal publishing will return on Friday.

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

View All Market Commentary

*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.

Copyright CME Group All rights reserved.