The spot Nat Gas futures price remains below the key technical resistance level of $3.60/mmbtu for the fourth trading session in a row as a modest short term downtrend within the trading range is starting to take shape. From a technical perspective the market is looking more and more like it will test the lower end of the trading range before making another attempt at breaking out to the upside.
On the fundamental front the latest six to ten day and eight to fourteen day temperature forecasts remain biased to the bearish side. Although the forecasts are projecting more normal temperatures in the western half of the country the high demand eastern half of the country is expecting above normal temperatures through the third week in December and possibly beyond. Last week was an above normal heating demand period for Nat Gas and that will be reflected in tomorrow's EIA inventory report (see below for more details). However, the warming has already hit this week and will likely result in lower than normal Nat Gas heating related demand which could push inventories back into an injection mode which is atypical for this time of the year.
Barring a bullish surprise in this week's inventory report I am expecting Nat Gas prices to remain range bound and within the $3.36/mmbtu to $3.60/mmbtu area until there is a clear sign that the weather is once again turning back to more normal winter like temperatures.
This week the EIA will release its inventory report on its normal schedule... on Decembers 6th at 10:30 AM. This week I am projecting a net withdrawal of 55 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 14 BCF and the normal five year net withdrawal for the same week of 51 BCF. Bottom line the inventory surplus will narrow modestly again 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 modestly below 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 surplus move into a deficit of about 15 BCF. The surplus versus the five year average for the same week will narrow to around 186 BCF. This will be a neutral to bullish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a wide range of a 50 BCF to about a 90 BCF net withdrawal with the consensus forming in the mid 60's.
The US fiscal cliff negotiations or should I say the lack of a deal just yet resulted in an early day rally on Tuesday stalling by the afternoon and sending equities and oil into negative territory for the day. Comments from both sides in the media created more uncertainty for market participants sending the weak longs to the sidelines. The markets are playing out as I have been suggesting for weeks... higher than normal volatility and sudden price reversals for nothing other than comments over the media airwaves. This pattern will continue until there is a clear signal that a deal has been reached. At the moment most traders and investors have a very short term horizon and seem very unwilling to sit with any major position for any length of time.
Overnight we have seen a modest rebound in equities and oil prices on comments from the newly installed Chinese government indicating that they will keep their macroeconomic policies stable making adjustments as needed. Market participants in Asia took that as a positive sign resulting in a rally in most Asian equity markets which has carried over into European trading. Just about every area of the global economy is fragile at best with some areas showing signs of stability. The macroeconomic data over the next month or so will be very telling as to whether what looks like stability in some areas is truly the beginning of a turning point or simply a continuation of the slow growth pattern that has been in play for well over a year.
For example in the US the ever important nonfarm payroll data will be released on Friday. The market is currently expecting 90,000 new jobs created with the headline unemployment number coming in at 8%. If the actual number is in sync with the expectations it will certainly not be a very robust outlook and one that suggests the US economy is still not creating nearly enough jobs to simply keep up with the new entrants into the economy let alone impacting the large numbers of people already out of work.
I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are once again suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... especially after last week's bearish inventory snapshot. 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 early stages of the winter heating season and currently those forecast are all mostly bearish.
I am keeping my view at neutral and maintaining my bias toward the cautiously bullish side as the oil markets may get a boost from what seems to be a slightly changing sentiment coming from the financial markets. At the moment 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 remains in the price in anticipation of a spreading of the civil war in Syria as well as the ongoing concerns over Iran's nuclear program. In the short term the price of oil will move based more on the markets view of the global economy, the US fiscal cliff negotiations and less so on the geopolitics. This is still an event driven market for oil at the moment.
Markets are mostly higher heading into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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