Yesterday's EIA inventory report was certainly a surprise as most all of the forecasts were expecting the third net withdrawal of the season from inventory. A small injection of 4 BCF was reported (see below for more details on the inventory report). The report demonstrates that marginally colder than normal temperatures are not going to do the trick in drawing Nat Gas from inventory as supply still remains robust. The temperatures are going to have to be colder than normal over a large portion of the US for an extended period of time for the inventory pattern to move into a sustainable net withdrawal. If not we will continue to see additional injections even though we are now in the third month of the so called winter heating season.
The latest NOAA six to ten day and eight to fourteen day temperature forecasts also remain bearish with above normal temperatures forecast across the majority of the US (except Florida) in the six to ten day forecast. In addition the eight to fourteen day forecast... although marginally less bearish is still projecting above normal temperatures over about two thirds of the US including the highly populated and heavy Nat Gas heating area of the northeast. With a warming starting over the next few days it now looks like the first half of December is going to be a below normal period for Nat Gas heating related demand and thus a high likelihood for at least several more injections into inventory during the aforementioned weather forecast period . At the moment it does not look like the injection season is over just yet.
About the only somewhat bullish price driver for Nat Gas is the above normal amount of nuclear power generation capacity that remains shut down. Currently there is about 20,000 MW shut down for maintenance compared to 9,199 MW last year and 11,900 versus the five year average. This pattern has been in play for the last several weeks and has certainly resulted in additional Nat Gas consumption for power generation offsetting what would likely have been a even large injection into inventory this week.
From a technical perspective Nat Gas is now clearly on a path to test the lower end of the trading range of around $3.60/mmbtu as I projected earlier in the week. If this key support level is breached the next level of support is not until around the $3.36/mmbtu level or the level the price was trading at back in the middle of September. The short term direction of the Nat Gas market will continue to be primarily driven by the daily short term temperature forecasts as well as how the actual weather compares to the projections. For the moment both of these main price drivers are biased to the bearish side.
Thursday's EIA report was bearish from the perspective that the injection was surprise compared to the consensus forecast for a net withdrawal. In addition this week's injection was slightly greater than last year's injection and modestly bullish compared to the net withdrawal for the five year average for the same week. The 4 BCF injection was greater than the expectations and the market consensus calling for a withdrawal of around 15 BCF. The injection of 4 BCF was greater than my model forecast (-15 BCF withdrawal) this week. The inventory surplus widened versus last year and versus the more normal five year average. The current inventory surplus came in at 190 BCF above the five year average or about 5.2% above.
This week's 4 BCF injection compares to last year's net injection of 2 BCF and the withdrawal for the five year average of 18 BCF for the same week.
Working gas in storage was 3,877 Bcf as of Friday, November 23, 2012, according to EIA estimates. This represents a net increase of 4 Bcf from the previous week. Stocks were 26 Bcf higher than last year at this time and 190 Bcf above the 5-year average of 3,687 Bcf. In the East Region, stocks were 5 Bcf above the 5-year average following net withdrawals of 12 Bcf. Stocks in the Producing Region were 135 Bcf above the 5-year average of 1,152 Bcf after a net injection of 12 Bcf. Stocks in the West Region were 50 Bcf above the 5-year average after a net addition of 4 Bcf. At 3,877 Bcf, total working gas is above the 5-year historical range.
Working gas stocks in the Producing Region, for the week ending November 23, 2012, totaled 1,287 Bcf, with 317 Bcf in salt cavern facilities and 970 Bcf in nonsalt cavern facilities. Working gas stocks increased 6 Bcf in the salt cavern facilities and increased 6 in the nonsalt cavern facilities since November 16.
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 throughout most of the injection season. The rate of growth of the surplus has been changing throughout of the injection season as this year's injection season has been underperforming significantly versus last year including this week. Compared to last year total inventories are now showing a surplus of just 26 BCF or 0.7% above last year.
As shown in the following table total inventories are now at 91.4% of maximum workable storage capacity with the Consuming East region at 92.0% of maximum.
With the end of another trading month looming the short term direction of most financial and commodity markets are in the hands of the political cast of characters in Washington DC as they try to negotiate a deal to the upcoming fiscal cliff before the end of the year trigger hits. It seems that the rhetoric from Washington, DC changes daily with yesterday being one of the negative, low probability of a deal type days or just the opposite of what the 30 second news snippets were suggesting on Wednesday. Both sides are continuing to position themselves in an attempt to get the most out of the talks before finally agreeing to a solution. It is a sad state of affairs when the political leaders of the US... including the President continue to play a game with the future direction of an already fragile US economy. It is time to stop the game playing and do a deal.
That said I still believe there will be a deal but it will not be easy nor will it come with much time left before the deadline. While the politicians engage in their back and forth comments in the media the market will be faced with a period of above normal volatility and a high level of susceptibility for market reversals at any time and based on nothing other than the 30 second news snippets hitting the media airwaves. I must say that even with mostly negative comments emerging yesterday the financial markets have held up pretty well suggesting to me that more players may be starting to also view that a deal of some form will actually get done before the deadline.
Contributing to a less negative market sentiment was the US macroeconomic data released yesterday that came in better than expected. Weekly initial jobless claims dropped while the second revision to third quarter GDP jumped to 2.7% from 2% compared to the first release. The US economy may be starting to stabilize... which is certainly a positive and it should be a motivation to the politicians to get a deal done so any economic recovery that may be bubbling does not get stamped out quickly.
As it looks at the moment crude oil prices may be heading for a small monthly gain if today's prices levels hold throughout the US trading session. The spot WTI contract has been in a very slowly developing upward trending trading channel since about the first week in November. The upward movement was initially fueled by the evolving geopolitical situation in the Middle East which offset the negatives associated with a faltering global economy as well as the comfortably supplied oil market. The situation in the Middle East has eased since the truce has been put in place between Israel and Hamas and surprisingly oil prices have remained mostly steady since then with today's spot WTI price trading in the upper half of the aforementioned trading channel. The same pattern also holds for the spot Brent contract.
The possibility that the US economy may be starting to move in a positive direction once again along with a similar view about the main economic growth engine of the world... China the global economy could possibly be starting to act as a catalyst that keeps oil prices firm in the short to even medium term. Now that the new leadership has been confirmed for China market participants are starting to look at the possibility of China's growth starting to accelerate heading into 2013. This would be even more pronounced if China's two main export markets the EU and the US were also to begin to recover at a consistent pace. Bottom line... oil may start to get some support if the global economy does in fact begin to stabilize as consumption would begin to grow at a faster rate than what has been the case over the last year or so.
I am downgrading my Nat Gas price direction to cautiously bearish as the fundamentals and technicals are once again suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... especially after this week's bearish inventory snapshot. 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 early stages of the winter heating season and currently those forecast are all mostly bearish.
I am keeping my view at neutral and adjusting my bias to the cautiously bullish side as the oil markets may get a boost from what seems to be a slightly changing sentiment coming from the financial markets. At the moment there is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geoponics of the Middle East remains in the price in anticipation of a spreading of the civil war in Syria as well as the ongoing concerns over Iran's nuclear program. In the short term the price of oil will move based more on the markets view of the global economy, the US fiscal cliff negotiations and less so on the geopolitics. This is still an event driven market for oil at the moment.
Markets are mixed heading into the US trading session 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.