A bullish inventory report today but so far the reaction has been somewhat muted. The market is currently about $0.05/mmbtu above where it was trading at just prior to the release of the data. The current round of above normal temperatures along major portions of the east coast is currently contributing to the muted reaction. Today's inventory report could be the beginning of a change in the market direction as the temperatures across most of the country will be below normal beginning the third week in January. If the actual temps are in line with the latest NOAA projections we could see inventory withdrawal levels running at above normal levels heading into February.
As has been the case for the last several months the direction of Nat Gas prices is simply all about the weather. The first half of the winter heating season has been milder than expected and inventory withdrawals have mostly underperformed versus both last year and the five year average. If the weather pattern is actually moving into a sustained period of below normal or even normal winter like temperatures for the next several months the withdrawals from inventory will increase and the end of the season inventory levels will come in below last year but most likely above the longer term 5 year average.
If the weather does actually get colder the assault on the psychological $3/mmbtu for the spot Nymex Nat Gas contract may be avoided. We could be setting up for a move into a higher trading range say up to the $3.50 to $3.60/mmbtu level during the next month or so. Today the caution flag is raised from the short side of the market. I am moving my bias to neutral to see how the weather plays out over the next week or so.
Thursday's EIA report was bullish from the perspective that the report showed a net withdrawal that was greater than all of the consensus forecasts as well as greater than both last year's draw and the net withdrawal for the five year average for the same week. The 201 BCF withdrawal (above normal for this time of the year) was greater than the expectations and the market consensus calling for a withdrawal of around 186 BCF. The draw of 201 BCF was greater than my model forecast (-170 BCF withdrawal) this week. The inventory surplus disappeared and moved into a deficit position versus last year but still surplus versus the more normal five year average. The current inventory surplus narrowed to 309 BCF above the five year average or about 10.7% above.
This week's 201 BCF withdrawal compares to last year's draw of 117 BCF and the withdrawal for the five year average of 121 BCF for the same week.
Working gas in storage was 3,316 Bcf as of Friday, January 4, 2013, according to EIA estimates. This represents a net decline of 201 Bcf from the previous week. Stocks were 88 Bcf less than last year at this time and 320 Bcf above the 5-year average of 2,996 Bcf. In the East Region, stocks were 93 Bcf above the 5-year average following net withdrawals of 113 Bcf. Stocks in the Producing Region were 156 Bcf above the 5-year average of 996 Bcf after a net withdrawal of 61 Bcf. Stocks in the West Region were 71 Bcf above the 5-year average after a net drawdown of 27 Bcf. At 3,316 Bcf, total working gas is within the 5-year historical range.
Working gas stocks in the Producing Region, for the week ending January 4, 2013, totaled 1,152 Bcf, with 283 Bcf in salt cavern facilities and 870 Bcf in nonsalt cavern facilities. Working gas stocks decreased 19 Bcf in the salt cavern facilities and decreased 41 in the nonsalt cavern facilities since December 28.
The following chart shows the difference between current total Nat Gas inventories compared to last year and the five year average. The direction has been a narrowing of the surplus in inventory for the last few weeks. The current inventory level is once again below last year at this time but above the five year average. Compared to last year total inventories are now showing a deficit of 61 BCF or -2.6% above last year.
As shown in the following table total inventories are now at 78.2% of maximum workable storage capacity with the Consuming East region at 76% of maximum. This compares to storage sitting at 79.6% of capacity last winter at this time.
As I detailed in yesterday's newsletter the global oil supply and demand balance can be isolated into two major parts... the US on the supply side and China on the demand side. This week the US side of the equation was bearish on several counts... forecasted production growth for 2013 as well as yesterday's bearish weekly oil inventory report (see below for a more detailed discussion). On the other hand the market got a boost from the demand or China front after the latest Chinese customs data released overnight showing Chinese crude oil imports in December rose by 8% year over year. In addition the value of China's exports grew by 14.1% in December compared with the same period last year.
The data out of China was a positive but the data for the US was more of a negative than the China data in my view. That said it shows the market's bias at the moment is looking for any reason to push values higher as it discounted this week's bearish supply data pretty quickly and embraced the Chinese data released overnight. Thus for the short term the market may have limited downside as the sentiment could be changing more toward an upward bias. In addition the technicals have turned more bullish in that both the spot WTI and Brent crude oil futures contracts have now broken out of the upward trending trading channel to the upside today. If the market settles above these levels it does suggest that WTI could eventually find its way to a test of the $100/bbl level.
Needless to say I would be very cautious on further moves to the upside simply on Chinese export value data versus growing production in the US along with building inventories and a relatively quiet geopolitical landscape. Also when everyone is expecting the market to continue to be driven by relatively normal price drivers it will not be too long before the next act of the comedy of errors play resumes in Washington DC to discuss the fiscal cliff and the debt ceiling. It should be as contentious as ever and will result in the 30 second news snippets hitting the media airwaves and impacting market direction. Or in other words it will not be too long before we move back into an event driven market environment once again.
I am maintaining my Nat Gas view at cautiously bearish as the fundamentals and technicals are still suggesting that the market could be heading lower for the short term. However, I anticipate that the market is now 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 higher as shown in the following table.
Dominick A. Chirichella
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