Once again Nat Gas futures were unable to get through what is looking like a relatively strong resistance level around the $4.40/mmbtu area for the spot Nymex contract. That said prices have been hovering near the upper range resistance level for most of the last two weeks. The late start to normal spring like weather has been one of the main fundamental price supports along with the simple fact that inventories are significantly below last year and modestly below the more normal five year average.
Although the market is struggling to move to the next price area there is no indication that the market is heading for a collapse in prices anytime soon. At the moment the futures market is range bound within the $4.16/mmbtu to $4.40/mmbtu trading range. The market is already trading at the lower end of the trading range that was in play for a major portion of 2011 or prior to the time when the oversupply situation hit the market. The market is currently looking for the next catalyst to drive it through the $4.40/mmbtu level and enter into a new, higher trading range and one that would bring prices back to the levels Nat Gas was trading at back in the middle of 2011.
The most interesting fundamental observation is Nat Gas production remains at relatively high levels and inventories have been underperforming compared to both last year and the five year average for the majority of this year so far. During the second half of the winter net withdrawals were larger than the comparable historical periods while the belated injection season has underperformed versus last year and the five year average throughout the short injection season so far. This week will be no different as the forecasted injection level should be below last year and the five year average.
Although the market is having difficulty in getting to the next price range the fundamentals are supportive of higher rather than lower prices and are likely to remain so until there is a sign that inventories are building at an above normal level (as was the case last year). With the shoulder season winding down and the weather still remaining seasonably cold the market may be skipping the low demand period and moving right into the summer cooling season within the next month or so. As such we may see inventory injections underperforming for a longer than anticipated timeframe. At the moment the market is looking for a window to initiate another round of buying as not only do the traders seem to have a positive sentiment but in addition longer term investors are still looking for windows to enter the market.
The daily six to ten day and eight to fourteen day temperature forecasts have not changed materially at all this week with the latest forecast still showing a major portion of the mid-west expecting below normal temperatures through mid-May. There will be some level of heating demand but with minimal, if any Nat Gas related cooling demand as not much of the US is expecting strongly above normal temperatures through mid-May. Overall the forecast is supportive for Nat Gas prices in the short term. This week the EIA will release its inventory on its normal schedule and time... Thursday May 2nd at 10:30 AM.
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This week I am projecting the third injection of the season of 30 BCF into inventory. My projection for this week is shown in the following table and is based on a week that experienced a low level of above normal temperatures during the report period. My projection compares to last year's net injection of 31 BCF and the normal five year net injection for the same week of 67 BCF. Bottom line the inventory deficit hold steady this week versus last year but the deficit will widen compared to the five year average if the actual numbers are in sync with my projections. This week's net injection will be supportive when compared to the historical data.
If the actual EIA data is in line with my projections the year over year deficit will come in at about 808 BCF. The deficit versus the five year average for the same week will widen to around 131 BCF. The early market consensus is projecting the third injection of the season in the range of 25 BCF to 40 BCF.
After attempting to breakout through the upper range resistance level all of the commodities in the oil complex failed and have been in retreat mode since early yesterday and into this morning so far. Crude oil has made a strong recovery since bottoming in the middle of April when WTI was trading in the mid- $80's and Brent was down to about $97/bbl. As I have been discussing for the last two weeks the overriding fundamentals remain biased to the bearish side as global oil demand continues to show all of the signs that it is likely to slow in sync with the slowing global economy. The technicals have painted a different picture as a relatively strong short covering rally has occurred over the last several weeks.
Overnight the latest data point from the main oil demand growth engine of the world…China… was released and supports the prevailing view on oil demand. The China Federation of Logistics and Purchasing reported that its energy sensitive manufacturing PMI declined to 50.6 in April from 50.9 in March. Although the level is still above the so called expansion threshold of 50 this index has been gradually slowing suggesting that future economic growth may also follow and slow further.
The Agency said that export orders, prices and other indicators have also been slowing steadily. With the majority of the projected oil demand growth expected to come from China in 2013 the current data suggests that the projections for oil demand growth are likely to be ratcheted down again when the three oil forecasting agencies (IEA, EIA and OPEC) release their next round of forecasts beginning next week.
Staying with the macroeconomics today the ever important employment data cycle starts in the US culminating with the release of the nonfarm payroll data. The industry is expecting a net gain of about 155,000 new jobs after last month's disappointing 88,000 job gain. The headline unemployment rate is expected to remain steady at 7.6%... unless of course there is another notch down in the participation rate or simply more people giving up looking for jobs and thus making the employment rate look lower than it actually is.
Over the last month or so the vast majority of the macroeconomic data that has been released suggests that the global economy is continuing to slow including the high flyers like China and other emerging market countries. The developed world economies are truly mixed with most of Europe in recession while the US economy is growing but at a below normal rate for this phase of the recovery period. With oil supply remaining robust and with demand growth faltering there is likely to be a continuation of an imbalance biased to the supply side for the short to medium term and thus a cap on oil prices going forward.
I am maintaining my view at neutral for Nat Gas but upgrading my bias to cautiously bullish even though the spot Nymex futures contract is struggling to breach the $4.40/mmbtu resistance level. The fundamentals are becoming more supportive as the gap in inventories versus the historical period is continuing to widen. So far there is no sign that inventory injections are going to surge to above normal levels anytime soon.
I am maintaining my view of the entire complex at a neutral with a cautiously bullish bias the short term price recovery in oil over the last week or so short could extend further. Global demand growth is still looking like it is turning to the downside. Brent & WTI both breached their range resistance levels suggesting further upside potential in the short term. Markets are mostly higher at the start of the US trading session as shown in the following table.
Dominick A. Chirichella
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