As I have been discussing in the newsletter this week today's EIA Nat Gas inventory report was biased to the bullish side (see below for a more detailed discussion). The futures market has bounced a bit higher since the report was issued.. mostly on short covering. I do not think there are many new longs getting into the market at this point in time as the latest NOAA six to ten day and eight to fourteen day forecasts are projecting above normal temperatures across the eastern half of the US into the third week of January. Thus although today's inventory report outperformed both last year and the five year average the upcoming reports reflective of the forecasted temperature period should be more in line with the withdrawal level from last year.
I still view the current futures trend as biased to the downside with a possibility of testing the $3/mmbtu level if real winter like weather does not enter onto the scene in the near future. We are now more than half way through the official winter heating season (October through March) and the surplus sitting in inventory is still above last year at this time... a warmer than normal winter and modestly above the same time during the winter of 2010/2011... which was a more normal and even colder than normal winter period.
With less than three months left to the winter heating season and with projections for warmer than normal temperatures for several weeks in January that leaves about 2 months of winter for Nat Gas inventories to get down to more normal end of season levels. As it stands at this point in time I would expect Nat Gas inventories to end the season at above normal levels which will keep a tight lid on any upside moves in prices in the short to medium term.
Thursday's EIA report was bullish from the perspective that the report showed a net withdrawal that was greater than most of the consensus forecasts as well as greater than both last year's draw and the net withdrawal for the five year average for the same week. The 135 BCF withdrawal (above normal for this time of the year) was greater than the expectations and the market consensus calling for a withdrawal of around 127 BCF. The draw of 135 BCF was greater than my model forecast (-120 BCF withdrawal) this week. The inventory surplus narrowed modestly versus last year and versus the more normal five year average. The current inventory surplus came in at 389 BCF above the five year average or about 12.4% above.
This week's 135 BCF withdrawal compares to last year's draw of 77 BCF and the withdrawal for the five year average of 111 BCF for the same week.
Working gas in storage was 3,724 Bcf as of Friday, December 14, 2012, according to EIA estimates. This represents a net decline of 82 Bcf from the previous week. Working gas in storage was 3,517 Bcf as of Friday, December 28, 2012, according to EIA estimates. This represents a net decline of 135 Bcf from the previous week. Stocks were 23 Bcf higher than last year at this time and 389 Bcf above the 5-year average of 3,128 Bcf. In the East Region, stocks were 122 Bcf above the 5-year average following net withdrawals of 84 Bcf. Stocks in the Producing Region were 186 Bcf above the 5-year average of 1,027 Bcf after a net withdrawal of 36 Bcf. Stocks in the West Region were 81 Bcf above the 5-year average after a net drawdown of 15 Bcf. At 3,517 Bcf, total working gas is above the 5-year historical range.
Working gas stocks in the Producing Region, for the week ending December 28, 2012, totaled 1,213 Bcf, with 302 Bcf in salt cavern facilities and 911 Bcf in nonsalt cavern facilities. Working gas stocks decreased 8 Bcf in the salt cavern facilities and decreased 28 in the nonsalt cavern facilities since December 21.
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. That said the current inventory level remains above last year at this time as well as the five year average. Compared to last year total inventories are still showing a surplus of 23 BCF or 0.7% above last year.
As shown in the following table total inventories are now at 82.9% of maximum workable storage capacity with the Consuming East region at 81.1% of maximum. This compares to storage sitting at 82.4% of capacity last winter at this time.
The latest FOMC meeting minutes put a bit of a damper on the fiscal cliff rally as most risk asset markets are flat to lower with the oil complex falling modestly. Yesterday's release of the US Fed FOMC minutes from its last meeting indicated that there was some disagreement among members as to when the massive money printing or quantitative easing should end. Some members would like to slow or end the program before the end of 2013. This has put a bit of a negative tone over the commodity markets as an end to the $85 billion dollar per month of easing would certainly reduce the risk of inflation and thus a negative for higher oil and commodity prices.
The minutes surprised many investors who were still of the view that there was no end date yet discussed. The FOMC still intends to keep short term interest rates near zero until the unemployment rate falls below 6.5% as long as inflation remains below 2.5%. In spite of the comments from some members on an end date for QE the overall Fed policy will remain very accommodative throughout 2013 and possibly beyond. The Fed remains a bullish or supportive price driver for equities and most risk asset markets.
Today the market will quickly switched its attention away from the fiscal cliff deal and into the US Labor Department release of the market moving monthly nonfarm payroll data and headline unemployment rate . The number came in within the expectations with a 155,000 new net jobs created while the headline unemployment rate increased to 7.8%. Overall I would categorize today's report as neutral to slightly bullish as it shows that the US economy has a long way to go before it can function on its own or without massive money printing form the US Central Bank.
Global equity markets have been relatively quiet overnight and ahead of today's employment data from the US. The EMI Global Equity Index is higher by 2.8% for the week (and the year to date) and starting out 2013 much like it did in 2012. Brazil currently is at the top of the list of indices with Canada and China still holding the bottom... although they are both marginally positive for the year. Global equities have been a positive for the broader commodity complex but as described above the Fed minutes have offset the support coming from the equity sector at the moment.
The short term uptrend that has been in play since early December for both the spot WTI and Brent futures contracts is starting to lose its momentum. Both contracts are approaching an intermediate technical channel support suggesting that lower prices may be on the horizon in the short term. Although they are both still technically in an uptrend they both failed to follow through to the upside during the fiscal cliff deal rally that began at the end of last week. I am changing my bias to neutral to see if the aforementioned support area holds over the next day or so.
On the fundamental from last night's API inventory data was mixed while Reuters is reporting that Iran's top nuclear negotiator indicated that Iran has agreed to talks with the six major powers over this nuclear program sometime in January with no specific time or date yet to be determined. Another round of meetings would certainly lower the geopolitical risk premium in the price of oil... at least until the talks take place. If the new round of talks proceed as they have for the last 10 years then not much will come out of the talks and the risk premium will once again start to widen as the market would then switch its attention back to the prospects for military action by the Israelis and/or others. On the other hand with the sanctions actually impacting the flow of oil out of Iran this round of talks could possibly turn out to be much more constructive than any of the previous negotiations that have taken place over the years. For now the market is viewing the possibility of another round of talks as biased to bearish side for oil.
I am maintaining my Nat Gas view at cautiously bearish as the fundamentals and technicals are now suggesting that the market may be heading lower for the short term. I anticipate that the market is now 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 back to neutral as the current fundamentals are still biased to the bearish. In addition the technicals are indicating that the upside momentum has eased as the market has now moved toward the intermediate channel support level over the last two days. 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
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