Warmer than normal temperatures continue to drive Nat Gas prices lower. It is in the mid- 50's in the New York area on January 9... the heart of the winter heating season. Temperatures are forecast to remain above normal along the high Nat Gas consumption area of the east coast at least into the third week of January. However, the weather pattern seems like it could be changing as we get toward the end of January. The big question will be if the pattern does change will it be enough to push consumption high enough to make up for some of the lost consumption experienced during the first half of the winter or will it simply be too little too late.

From what I see at the moment I think it will be biased toward too little too late as season ending inventories are likely to come in well above normal... but below last year which was even warmer than what is expected for this year. The latest EIA Short Term Energy Outlook is far from bullish as it is projecting production will remain relatively stable in 2013... despite a large decrease in rig counts while demand is not expected to grow much at all in 2013. So unless there is a sustained period of cold temperatures hitting the majority of the US sometime in the near future Nat Gas prices are likely to remain more biased to the lower end of its trading range for even the medium term.

Interesting that the market is projecting an above average withdrawal from inventory this week and the market has been steadily declining for most of the week. It shows the bearish sentiment that is offsetting what would normally be a bullish event under more normal winter conditions. As the EIA reports in its STEO report (see below) end of the year or the midway point in the winter heating season inventories came in 38 BCF above last year and well above the five year average... far from a positive outcome.

The EIA released their latest Short Term Energy Outlook yesterday afternoon. Following are the main Nat Gas related highlights from the report.

• EIA expects that natural gas consumption will average 69.7 billion cubic feet per day (Bcf/d) in 2013 and 69.4 Bcf/d in 2014. While total consumption is relatively unchanged from 2012, the makeup of consumption changes. Because of a warm winter last year, 2012 residential and commercial consumption was very low, and the hot summer (as well as relatively low natural gas prices) led to record-high use of natural gas for power generation. Forecasts for closer-to-normal temperatures in 2013 and 2014 will lead to increases in natural gas used for residential and commercial space heating. These increases are offset by declines in natural gas for power generation, as summer temperatures are expected to be closer to normal, meaning cooler than they were in 2012.

• Despite projected declines in electric power consumption from 2012 levels, consumption of natural gas for electric power generation remains high by historical standards and reflects a structural shift toward using more natural gas for power generation. While the shift toward more natural gas for power generation has been most evident in the Southeast, other major consuming areas have also increased natural gas consumption. Increased pipeline flows in New England during the summer months, for example, represent an increasing reliance on natural gas for power generation.

• This month's STEO expects continued growth in natural gas production, driven largely by onshore production in shale areas. In particular, production in the Marcellus Shale areas of Pennsylvania and West Virginia is expected to continue rising, as recently drilled wells become operational. Despite relatively low natural gas prices, Pennsylvania drilling continues at a strong pace as producers target combination oil-and-gas wells. Production has been rising despite large decreases in the natural gas rig count over the past year.

• This month's STEO expects that total marketed production will increase from 69.2 Bcf/d in 2012 to 69.8 Bcf/d in 2013, and drop slightly to 69.5 Bcf/d in 2014. EIA expects growth in Lower 48 onshore production will continue through 2014, and will be offset by Gulf of Mexico declines next year.

• Inventories of working natural gas in storage remain at high levels, after setting an all-time weekly record in November 2012. As of December 28, working gas stocks totaled 3,517 Bcf, which is 23 Bcf greater than the same time in 2011 and 389 Bcf greater than the previous five-year (2007-11) average, according to EIA's Weekly Natural Gas Storage Report. So far this winter, withdrawals have been limited, mainly because of warmer-than-normal temperatures in December. Five-year average weekly withdrawals in December are generally well above 100 billion cubic feet, but that occurred only during the last week of the month. For the week ending December 7, 2012, working gas inventories posted a net injection of 2 Bcf. Only two other net injections have been reported in the month of December: one in 2005 and the other time in 1998.

This week the EIA will release its inventory on its normal schedule and time...Thursday January 10th at 10:30 AM. This week I am projecting a strong withdrawal of 170 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a significant amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 117 BCF and the normal five year net withdrawal for the same week of 121 BCF. Bottom line the inventory surplus will narrow strongly this week versus last year and 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 below 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 30 BCF. The surplus versus the five year average for the same week will also narrow to around 340 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a wide range of 150 BCF to about a 190 BCF net withdrawal with the consensus still forming.

I am maintaining my Nat Gas view at cautiously bearish as the fundamentals and technicals are still suggesting that the market may be heading lower for the short term. I anticipate that the market is still positioned to possibly 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 mostly higher except for Nat Gas as shown in the following table.

Best regards,

Dominick A. Chirichella


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