The reaction to the larger than expected withdrawal from inventory (see below for more details) has resulted in the spot Nat Gas futures contract inching toward the upper end of the trading channel and at one point actually breaching the $3.50/mmbtu level. So far it has failed to stay above this level and has drifted in a tight range since the initial reaction. The reaction to the bullish inventory report is currently being capped by a combination of the market rising for most of the last week or so coupled with the latest NOAA six to ten day and eight to fourteen day temperature forecast now being less bullish than just yesterday's forecasts.

The area of expected colder than normal temperatures is now mostly focused on only about 20% of the country mostly around the Chicago area east toward the New England area. The eight to fourteen day forecast shows an even smaller area of winter like weather with about 1/3 of the country expecting above normal temperatures. As it looks to me at this point in time the colder than normal weather pattern does not look like it will be around or an extended period of time and as such I think Nat Gas prices will have difficulty continuing to move higher for a sustained period of time.

Thursday's EIA report was bullish from the perspective that the report showed a net withdrawal that was greater than most 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 148 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 136 BCF. The draw of 201 BCF was slightly greater than my model forecast (-145 BCF withdrawal) this week. The year over year inventory situation remains in a deficit position versus last year but still surplus versus the more normal five year average. The current inventory surplus narrowed to 316 BCF above the five year average or about 11.1% above.

This week's 148 BCF withdrawal compares to last year's draw of 89 BCF and the withdrawal for the five year average of 144 BCF for the same week.

Working gas in storage was 3,168 Bcf as of Friday, January 11, 2013, according to EIA estimates. This represents a net increase of a net decline of 148 Bcf from the previous week. Stocks were 147 Bcf less than last year at this time and 316 Bcf above the 5-year average of 2,852 Bcf. In the East Region, stocks were 92 Bcf above the 5-year average following net withdrawals of 86 Bcf. Stocks in the Producing Region were 156 Bcf above the 5-year average of 957 Bcf after a net withdrawal of 39 Bcf. Stocks in the West Region were 68 Bcf above the 5-year average after a net drawdown of 23 Bcf. At 3,168 Bcf, total working gas is within the 5-year historical range.

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 146 BCF or -4.4% above last year.

As shown in the following table total inventories are now at 74.7% of maximum workable storage capacity with the Consuming East region at 72.1% of maximum. This compares to storage sitting at 78.2% of capacity last winter at this time.

The market mostly discounted the huge build in crude oil in the mid west area of the US as well as the eight weekly build in gasoline stocks and rather focused on perception that oil fundamentals will improve going forward. Supply continues to outstrip demand but the market seems to only focus on the demand side of the equation improving as the global economy improves across 2013. Even OPEC acknowledged in their monthly oil report yesterday that demand is slowing as the main result OPEC reduced crude oil production in the later part of 2012.

Tomorrow we get a snapshot of the state of the main economic and oil demand growth engine of the world... China. The market is expecting fourth quarter GDP grew by 7.8% compared to the same time frame a year ago. If the actual number is in sync with the expectations it will be an increase from third quarter GDP of 7.4%. China has been aggressively easing its monetary policy as well as increasing its investment pace within the country. As long as inflation stays in check China is likely to continue with an easy money policy as well as aggressive infrastructure investments to bolster the economy and offset the slow growth of its two main export markets...Europe and the US.

Technically WTI is still hovering near the upper end of its trading channel while Brent lost some of its upside momentum this week and has dropped back to the middle of its upward trading range. The market seemed to be unwinding long Brent/WTI spreads yesterday as the expanded Seaway pipeline is now pumping at 400,000 bpd. Yesterday's move was a bit surprising as both PADD2 and Cushing, OK crude oil inventories surged higher on the week and are sitting at all time highs. Overall the market is well supplied with demand still lackluster. I would be very cautious trading from the long side at the moment.

I am maintaining my Nat Gas view at neutral with an eye toward the upside if we get further follow through buying and supportive weather forecasts. I now anticipate that the market is 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.

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

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