The decline in Nat Gas futures prices yesterday were tempered a bit by the cold nearby temperatures, a major storm along the northeast and a short term forecast from NOAA that is more supportive for additional Nat Gas related heating demand than the forecasts from earlier in the week. That all said the spot Nat Gas futures prices is still solidly trading within the $3.20 to $3.50/mmbtu trading range that has been in play since early November of 2012.

Whether or not the current round of cold temperatures will strongly impact demand and thus prices it is still an uncertainty as to whether this is the beginning of a sustained cold spell or just another period that falls into the winter pattern experienced so far. The pattern has consisted of relatively short periods of colder than normal temperatures followed by periods of warmer than normal temperatures. Kind of a flip - flop winter pattern. So far this pattern has resulted in the overall winter heating season to date coming in colder than last year's very warm winter but still warmer than normal. The net result will likely be an end of the winter heating season inventory level about 15 to 20% above normal but below last year's record high end of season inventory level.

At the moment I still do not see the spot futures price breaking out of the existing trading range anytime soon. A few days ago I thought the short term momentum would have resulted in a test of the upper end of the trading range. After yesterday's bearish inventory report the probability of that happening has definitely decreased. So for the moment I would expect the market to remain range bound with the trading community focused primarily on short term trades around the parameters of the trading range. I do not expect any surge of long term trades entering the market.

Next week's inventory is likely to be more bullish than last year. Some of the early expectations I have seen are in a range of about 125 to 190 BCF net withdrawals. Last year for the same week the net withdrawal was 113 BCF while the five year average came in at 154 BCF. This report reflects a colder than normal period especially along the high demand east cost. As such I am leaning more toward a net withdrawal above the five year average. I will publish my estimate in Monday's newsletter.
In this week's EIA Weekly Nat Gas report residential and commercial natural gas consumption is almost exclusively used for heating, so colder weather brings increased consumption. Last year's record warm winter led to relatively low consumption in January and February 2012, the coldest months of the year. While this winter's heating season (November through March) began with relatively low natural gas use, particularly during the warm December 2012, consumption has increased with colder temperatures in 2013.

A return to cold temperatures drove prices back up in the Northeast. Prices at the Algonquin City gate trading location, which serves Boston, and the Transcontinental Pipeline's Zone 6 New York delivery point (Transco Zone 6 NY), which serves New York City, closed trading on Wednesday, January 30, at $7.42 per MMBtu and $3.99 per MMBtu, respectively. This represented a large decrease from their respective peaks last report week of $34.59 per MMBtu and $37.07 per MMBtu. However, the dip in prices at these two points proved to be temporary, as cold temperatures returned in the Northeast. By the close of trading on Friday, February 1, the Algonquin Citygate spot price was back above $30 per MMBtu and the Transco Zone 6 NY spot price was $13.28 (after reaching almost $14 per MMBtu at the close of trading the day prior). Although prices at these two market locations moderated somewhat by the end of the report week, they were well above their week-ago closing price, with Algonquin Citygate closing trading yesterday at $22.63 per MMBtu and Transco Zone 6 NY closing at $11.74 per MMBtu.
Looking at the individual or flat price situation for the two crude oils. The spot WTI contract has been in a short term downtrend since peaking at the end of January. That short term downtrend pattern currently remains in play. Brent has been in a medium term uptrend and is now hovering near a key technical resistance area of around $118/bbl. If this level is solidly breached the next stopping point is not until around the $121/bbl level.

On the refined product front the spot HO contract is still clearly in a medium term uptrend with the next level of resistance around the $3.26 to $3.27/gal level. From a fundamental perspective the nearby temperatures are below normal and the short term weather forecasts are more friendly than those from earlier in the week. 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 21th period. I believe that is what is currently helping to keep the HO sellers mostly on the sidelines. In addition the arb between Europe and the US East coast is not very supportive for movement of distillate cargoes in either direction.
RBOB gasoline lost some of its upside momentum as inventories have been building while demand has been relatively static. From a technical perspective the spot March RBOB contract seems to have peaked around the $3.07/gal level and looks poised to be entering into a short term downtrend. Thus for now the $3.07/gal remains resistance while technical support is not until around the $2.96/gal level.

At I discussed in detail this week the evolving geopolitical situation has certainly moved a bit closer to being in the forefront in the minds of the oil complex market participants and thus providing a layer of support for most of the commodities in the oil complex (WTI less so). In addition with relatively high correlations between oil, the direction of the global economy and the direction of equities any change in the directional pattern of the equity market will have a negative impact on oil irrespective of the oil fundamentals.

Equity markets have entered into a downside corrective pattern over the last week or so with the EMI Global Equity Index down by about 2% for the week so far and ahead of the last day of trading of the week in the US. If the downside correction continues to evolve it will limit any significant gains in oil prices from current levels and likely result in a push lower in oil prices.
Overall the macroeconomic data has been relatively supportive and suggestive that the global economy may have turned the corner and heading for a more accelerated pace of growth. In addition about two-thirds of corporate earnings beat to the upside... another sign that the economy is continuing to improve. Overnight the latest round of data out of China was supportive but could be a bit distorted... as it usually is... ahead of the major Lunar New Year holiday period coming up.

I am keeping my Nat Gas view and bias at 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 higher as shown in the following table.

Best regards,
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy

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