With precious little time left to the current winter heating season the bulls got another disappointment as the EIA weekly inventory report was bearish versus the market consensus and neutral at best versus the normal five year average net withdrawal for the same week (see below for a more detailed discussion). The spot Nat Gas futures price has breached the lower end ($3.20/mmbtu) of the trading range that has been in play since November. It is still too early in the session to conclude that this will be a more lasting move into a new, lower trading range or rather the market being just in a mode of the weak longs moving to the sidelines.
I would like to see a close below the $3.20/mmbtu to gain confidence that the current downside breakout is not a false breakout. As of this writing the market is already down by about 13% completely wiping out yesterday's short covering rally and then some. If we can close below the $3.20/mmbtu level the new trading range will be $3/mmbtu to $3.2/mmbtu. With the rest of the winter heating season not currently projected to experience any sustained cold spell it is still a higher probability that lower prices will be seen versus an upside price surge.
Thursday's EIA report was bearish from the perspective that the report showed a net withdrawal that was modestly lower than the expectations but around the 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 157 BCF withdrawal (around normal for this time of the year) was below the market consensus calling for a withdrawal of around 162 BCF. The draw of 157 BCF was less than my model forecast (-170 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 slightly to 348 BCF above the five year average or about 16% above.
This week's 157 BCF withdrawal compares to last year's draw of 113 BCF (a very warm winter period) and the withdrawal for the five year average of 154 BCF for the same week.
Working gas in storage was 2,527 Bcf as of Friday, February 8, 2013, according to EIA estimates. This represents a net decline of 157 Bcf from the previous week. Stocks were 270 Bcf less than last year at this time and 348 Bcf above the 5-year average of 2,179 Bcf. In the East Region, stocks were 94 Bcf above the 5-year average following net withdrawals of 116 Bcf. Stocks in the Producing Region were 185 Bcf above the 5-year average of 775 Bcf after a net withdrawal of 33 Bcf. Stocks in the West Region were 69 Bcf above the 5-year average after a net drawdown of 8 Bcf. At 2,527 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 271 BCF or -9.7% above last year.
As shown in the following table total inventories are now at 59.6% of maximum workable storage capacity with the Consuming East region at 53.5% of maximum. This compares to storage sitting at 66% of capacity last winter at this time.
Equities, oil and most other risk asset markets are in decline after a lower than expected Q4 GDP for Japan as well as lower than what was reported for Q3. In Europe GDP for Q4 declined by 0.8% for the EU... a big increase over Q3's decline of 0.1% as well as greater than the expectations. Individually the main economic engine of the EU.... Germany saw it Q4 GDP drop by 0.6% versus a market expectation of 0.5%. France's GDP also dropped more than expected. Europe is sinking deeper into recession as the sovereign debt issues still linger but at least not as pronounced as they were just a year ago.
The euro is down strongly with the US dollar up accordingly on the negative growth numbers out of Europe. The euro-area recession is worst than most economists have forecast and the worst performance in almost four years. This pattern is negative for equities and oil (and most risk assets) as today seems to be setting up as a risk off trading session with the downside equity correction that began over a week or so taking on a new downside leg. Oil should follow the direction of equities as the correlations have been very high throughout the year.
Offsetting some of the downward momentum from the equity markets oil prices are lower but only slightly (so far) on news that UN nuclear officials failed to reach a deal on inspections with Iran. The International Atomic Energy Agency (IAEA) said today that time is needed to reflect a way forward. I must say this whole process with Iran has been going on for decades not just months. Iran has become a master at avoiding and postponing any of the hard decisions that the west is demanding. Even with all of the economic sanctions in place Iran seems to be continuing to move forward with its nuclear program. There is another negotiation session between Iran and the West on February 25th in Kazakhstan. Based on the outcome of many rounds of talks over the years I do not expect anything to come out of the upcoming meeting. Geopolitical risk remains an issue for the oil complex
Equity markets are on the defensive in Europe and in pre-open trading in the US after the negative growth data out of Japan and Europe. The EMI Global Equity Index is still up by about 0.2% for the week but the limited trading activity in Asia took place prior to the release of the negative European data. Since the data has been released the major bourses in Europe are down by almost 1% with US equity futures projecting a down opening of about 0.5% (as of this writing. The EMI Global Equity Index is still showing a 0.9% year to data gain with Brazil still at the bottom of the list while Japan currently holds the top spot. The EMI Index has been in a modest downward correction since peaking in the second half of January. Global equities have been a neutral to slightly bearish price drive for the oil complex.
I am maintaining 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 still in the heart of the winter heating season and currently those forecasts have turned a tad more bearish at the moment.
I am maintaining my view of WTI at neutral to cautiously bearish and downgrading my view for Brent to neutral to cautiously bearish. That said I am continuing to fly the caution flag as any additional equity market corrections will impact oil prices in much the same way... a round of profit taking selling. Furthermore the spot Brent contract has breached its technical resistance level of about $118/bbl suggesting lower prices in the short term.
Markets are mixed as shown in the following table.
Dominick A. Chirichella
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