Today's Nat Gas inventory report was bearish as it missed on the downside for the net withdrawal (see below for a more detailed discussion on inventories). The futures market immediately sold off after the data was released but seems to have stabilized(for the moment) around the $3.35/mmbtu area. Today's report should keep a lid on prices and preclude a breakout of the trading range that has been in play since November to the upside. Also with the nearby temperatures below normal and the short term weather forecasts more friendly than those from earlier in the week it is also unlikely that the lower end of the trading range is going to be breached anytime soon. At the moment I would expect the Nat Gas futures price to remain within the $3.20 to $3.50/mmbtu trading range for the short term.
The Nat Gas market is quickly running out of opportunities for a sustained cold spell. Although the winter has been colder than last year it is still running warmer than the more normal five year average. In addition the winter heating season has experienced lots of flip flops in the weather... warm one week then colder and to date there has not been an extended cold spell across the majority of the US. As such the futures market has been trading in the same trading range since November or in essence for the majority of the winter heating season so far.
The latest NOAA six to ten day and eight to fourteen day forecasts are both calling for a much larger area of the US expected to experience below normal temperatures for the February 12th through the 20th period. I believe that is what is currently tempering the selling since the bearish inventory has been released. The bulls are looking for any excuse to get a pass at trying to breach the upper trading range resistance one time this winter. If the March forecast calling for above normal temperatures across the majority of the US becomes a reality this may be the last stretch run for the bulls before the bears take solid control of the market heading into the shoulder season.
Thursday's EIA report was bearish from the perspective that the report showed a net withdrawal that was modestly lower than the expectations as well as five year average for the same week but above last year's draw... which of course was an extremely warm February. However, the number was bearish based on a miss to the downside versus the market consensus. The 118 BCF withdrawal (below normal for this time of the year) was below the market consensus calling for a withdrawal of around 132 BCF. The draw of 118 BCF was less than my model forecast (-132 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 widened to 351 BCF above the five year average or about 15% above.
This week's 118 BCF withdrawal compares to last year's draw of 94 BCF (a very warm winter period) and the withdrawal for the five year average of 165 BCF for the same week.
Working gas in storage was 2,684 Bcf as of Friday, February 1, 2013, according to EIA estimates. This represents a net decline of 118 Bcf from the previous week. Stocks were 226 Bcf less than last year at this time and 351 Bcf above the 5-year average of 2,333 Bcf. In the East Region, stocks were 118 Bcf above the 5-year average following net withdrawals of 88 Bcf. Stocks in the Producing Region were 174 Bcf above the 5-year average of 819 Bcf after a net withdrawal of 20 Bcf. Stocks in the West Region were 59 Bcf above the 5-year average after a net drawdown of 10 Bcf. At 2,684 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 226 BCF or -7.8% above last year.
As shown in the following table total inventories are now at 63.1% of maximum workable storage capacity with the Consuming East region at 58.7% of maximum. This compares to storage sitting at 68.6% of capacity last winter at this time.
On the economic side of the equation the ECB is meeting with a decision on interest rates and any policy changes pending. Today soon to be Bank of England head Carney said the bank should ultimately exit unconventional monetary policies in a manner that reinforces public confidence. He went on to day that the exit (when it happens) should not disrupt markets to avoid an sharp movements in a range o asset prices and financial stability. He said he has not made an assessment of the merits of altering the monetary policy framework in the UK and of course any change to monetary policy framework would be the sole responsibility of the government. Carney will take over the reins of the BOE in July.
The BOE just ended their monthly meeting and have decided to hold short term interest rates steady at 0.5% and maintain its quantitative easing program at $375 billion pounds. They expect the UK economy to grow only slowly with inflation likely to rise and exceed 2% over the next two years. Overall the comments for the UK central bank sound like the comments from just about all of the developed world countries... very slow growth, still must engage in a very accommodative monetary policy and inflation is a potential issue down the road. With the developed world continuing to print money... at a minimum this action will continue to provide a floor for most risk asset market values.
Macroeconomic data released were relatively light overnight with the ever volatile US initial jobless claims due out at 8:30 AM EST. The jobs picture in the US has taken on a added level of importance ever since the Fed officially linked its very accommodative monetary policy to the US unemployment rate. The Fed has stated that they would not change its QE or interest policy until the US unemployment rotate falls below 6.5% and as long as inflation does not surge higher. Thus any major deviation in any jobs data is likely to impact the short term direction of equities and ultimately oil prices.
Global equities have been in corrective mode for most of this week. The EMI Index is lower by about 1.5% for the week with the year to date gain narrowing to 1.1% or the lowest level so far this year. Although the developed world bourses have experienced a modest round of profit taking selling during the last week some of the developing world bourses like Brazil have been getting hit with strong waves of selling. In fact Brazil is now showing a year to date loss of 3.3% as their oil E&P slips behind schedule and inflation is still an issue. Inflation in Brazil accelerated in January at the fastest pace since 2005. At the moment the global equity markets are a neutral for oil prices and the broader commodity markets and are likely to remain as such until the current correction ends.
I am moving my Nat Gas view and bias to neutral as the weather forecasts and nearby temperatures remain somewhat supportive. 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 still in the heart of the winter heating season and currently those forecasts have turned a tad more supportive 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.
Dominick A. Chirichella
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*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.