Today's Nat Gas inventory came in below the market consensus but still above both last year and the five year average for the same week (see below for more details on the inventory report). The market has viewed the data as bearish in that the market is off about 2% as of this writing. It also supports my view that I have discussed in the newsletter that yesterday's gain in prices were mostly driven by a short covering rally ahead of the expectation for a bullish inventory report today. Another way of looking at the reaction is a buy the rumor, sell the fact pattern.

Next week's inventory report is going to be based on a period that has experienced very warm weather over a major portion of the eastern half of the US and thus the inventory withdrawal is likely to underperform versus history. The latest NOAA six to ten day and eight to fourteen day forecasts remain bearish as they are both projecting above normal temperatures over a major portion of the US for the period Feb 4th through the 13th. Inventory withdrawals are likely to underperform versus history during the aforementioned timeframe. With the longer range forecast projecting March to experience above normal temperatures over most of the US... a sort of early spring... that does not leave much potential for a sustained winter cold spell. The fundamentals remain bearish and are likely to stay bearish based on the current weather forecasts for the rest of the official heating season which end at the end of March.

From a technical perspective the spot Nat Gas futures contract remains within the $3.20 to $3.50/mmbtu trading range that has been in play since the middle of December of last year. Yesterday' short covering rally and today's subsequent decline has not changed anything from a technical viewpoint. Furthermore the market remains in a contango in the front end of the forward curve or normally when the market is still in a winter backwardation. The shape of the forward curve is another bearish signal for Nat Gas and reflective of the bearish current fundamentals. The market remains bearish from a technical perspective with a higher probability of the futures price testing the lower end of the trading range rather than staging an upward surge to the higher end of the trading range.

Thursday's EIA report was bullish from the perspective that the report showed a net withdrawal that was greater than last year's draw as well as the net withdrawal for the five year average for the same week. However, the number was bearish based on a miss to the downside versus the market consensus. The 194 BCF withdrawal (above normal for this time of the year) was below the market consensus calling for a withdrawal of around 206 BCF. The draw of 194 BCF was less than my model forecast (-200 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 304 BCF above the five year average or about 12.2% above.

This week's 194 BCF withdrawal compares to last year's draw of 149 BCF (a very warm winter period) and the withdrawal for the five year average of 178 BCF for the same week.

Working gas in storage was 2,802 Bcf as of Friday, January 25, 2013, according to EIA estimates. This represents a net decline of 194 Bcf from the previous week. Stocks were 202 Bcf less than last year at this time and 304 Bcf above the 5-year average of 2,498 Bcf. In the East Region, stocks were 102 Bcf above the 5-year average following net withdrawals of 129 Bcf. Stocks in the Producing Region were 153 Bcf above the 5-year average of 860 Bcf after a net withdrawal of 47 Bcf. Stocks in the West Region were 49 Bcf above the 5-year average after a net drawdown of 18 Bcf. At 2,802 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 194 BCF or -6.7% above last year.

As shown in the following table total inventories are now at 66.1% of maximum workable storage capacity with the Consuming East region at 62.7% of maximum. This compares to storage sitting at 70.8% of capacity last winter at this time.

I am keeping my Nat Gas view and bias at cautiously bearish as the weather forecasts and nearby temperatures remain bearish. 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 at the moment.

I am maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a move to the upside now that the spot WTI contract has breached its upper resistance level.

Markets are mostly lower as shown in the following table.

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

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