After four straight days of gains the Nat Gas futures market is under a round of profit taking selling as the market does not seem to be convinced that the upcoming cold weather is going to last for an extended period of time or at least for a long enough timeframe to have a significant impact on demand and thus inventories. The latest NOAA six to ten day and eight to fourteen day forecasts are still somewhat supportive for higher heating related demand except the latter forecast is showing a much smaller area of colder than normal temperatures toward the end of the month.
In addition today's EIA oil inventory report showed a larger than expected build in distillate fuels (diesel & heating oil) suggesting that the Nat Gas withdrawal may not be as large as forecast. Market participants are a bit skeptical that the second half of the winter heating season is going to remain consistently colder than normal. Unless the forecasts change to a much colder pattern and for a longer period of time Nat Gas demand will remain below average thus resulting in an above normal level of inventory at the end of the heating season. At the moment I am projecting an end of winter inventory level of about 2 to 2.1 TCF. This would be below last year but still above the morn normal fiver year averge.
From a technical perspective futures prices remain well within the $3.20 to $3.50/mmbtu trading range that has been in play since the first half of December. Tomorrow's EIA inventory report will have to be more bullish than forecast for the make to make an attempt to breach the upper level of the trading range.
This week the EIA will release its inventory on its normal schedule and time...Thursday January 17th at 10:30 AM. This week I am projecting an average withdrawal of 145 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced only a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 89 BCF and the normal five year net withdrawal for the same week of 144 BCF. Bottom line the inventory surplus will narrow week versus last year and hold steady compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be above the net withdrawal level for last year and at about the small level as the five year average net withdrawal for the same week if the actual outcome is in sync with my forecast.
If the actual EIA data is in line with my projections the year over year deficit will widen to about 143 BCF. The surplus versus the five year average for the same week will come in around 318 BCF. This will be a neutral weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a wide range of 120 BCF to about a 155 BCF net withdrawal with the Reuters consensus looking for a new withdrawal of 136 BCF.
In spite of market participants focusing more of their attention on the perception of what global oil demand might be down the road the nearby fundamentals remains mostly biased to the bearish side. Last night's API oil inventory report was neutral to bearish after another large build in gasoline stocks (see below for more details). Yesterday the World Bank issued their latest global forecast suggesting that the global economy is still fragile as high income countries continue to suffer from volatility and slow growth.
The World Bank estimates global GDP grew 2.3 percent in 2012. Growth is expected to remain broadly unchanged at 2.4 percent growth in 2013, before gradually strengthening to 3.1 percent in 2014 and 3.3 percent in 2015. Developing countries recorded among their slowest economic growth rates of the past decade in 2012, with GDP estimated to have grown 5.1 percent. Growth for developing countries is projected to expand by 5.5 percent in 2013, strengthening to 5.7 percent and 5.8 percent in 2014 and 2015, respectively.
Growth in high-income countries remains weak, with their GDP expanding only 1.3 percent in 2012 and expected to remain slow at an identical 1.3 percent in 2013. Growth should gradually firm to 2 percent in 2014 and 2.3 percent by 2015. In the Euro Area, growth is now projected to only return to positive territory in 2014, with GDP expected to contract by 0.1 percent in 2013, before edging up to 0.9 percent in 2014 and 1.4 percent in 2015. While diminished, downside risks to the global economy persist and include a stalling of progress on the Euro Area crisis, debt and fiscal issues in the United States, the possibility of a sharp slowing of investment in China, and a disruption in global oil supplies. On the premise that the global economy performs as projected by the World Bank 2014 is likely to be another year of supply outstripping demand especially supply coming from non-OPEC countries like the US.
If oil demand growth continues to languish and non- OPEC supply continues to rise it would seem that the pressure will be on OPEC in 2013 and in particular on Saudi Arabia who will likely have to cut production for a second time. The Saudi's cut production in November based on slowing demand for their crude oils.
On the supportive side the North Sea Brent pipeline system remains shut-in after an oil leak was discovered on January 14tg at a platform connecting to the field. The combination of the Brent logistics problems with what should be another build in both Cushing and PADD 2 crude oil stocks this week should keep the Brent/WTI spread supportive for the short term even though Seaway is now pumping at an expended rate of 400,000 bpd. The expiring Feb Brent/WTI spread has been steadily declining since peaking around $22/bbl in late November in anticipation of the additional barrels moving from the mid west via Seaway as well as by rail.
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 mixed as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
*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.