The spot Nat Gas futures price continues to hover below the now critical technical resistance level of $3.60/mmbtu. The latest NOAA six to ten day and eight to fourteen day temperature forecasts are less bearish than those issued over the weekend. That said they are still projecting above normal temperatures over a large area of the eastern half of the US with the six to ten day forecast more bearish than the longer term projection. During the first half of December Nat Gas heating related demand will be below normal and could result in one or two injections before the inventory pattern returns to its normal withdraw mode for the winter season. That said even if the latest forecast does not result in an injection the withdrawals would be very minimal over the aforementioned timeframe.
Nat Gas is going to have to clear the current resistance level of $3.60/mmbtu for an uptrend leg to begin. Unless the weather turns decidedly bullish and/or the inventory report is a bullish surprise I think the market will then remain in the $3.36/mmbtu to $3.60/mmbtu trading range until there is a clear sign that winter weather is actually on the way. The main fundamental price driver for Nat Gas continues to be the weather and how the weather impacts the inventory injections and withdrawals. As we get to the main part of the winter heating season (Jan thru Mar) if the actual temperatures come in as the longer term forecasts are still projecting Nat Gas prices will then likely work their way back to the $4/mmbtu level and possibly higher, However, if the current warmer than normal weather pattern carries over into January $3/mmbtu may then be in the cards.
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 still forming.
Oil prices are back to being mostly driven by the markets' view of the global economy, oil fundamentals and secondarily by the geopolitics in the Middle East. Yesterday's macroeconomic data out of the US was disappointing resulting in a round of selling first hitting the financial markets followed by pushing oil prices well off of the highs hit early in the session. The underperformance of the US manufacturing sector offset the positive sentiment that developed overnight after China's better than expected PMI data. In addition the 30 second news snippets were flying over the US fiscal cliff with the Republicans putting their offer on the table and sending the ball back to the Presidents courts.
A deal will get then but not until all sides are finished posturing and trying to get the most for their side. As I have been indicating the main thing for certain is volatility with the potential for sudden reversals in the price of oil and other financial instruments will be the norm during the evolution of the negotiations. I still believe the overriding factor that will bring the parties to a deal is the fear of being blamed for sending the US back into its second recession in four years. As we saw yesterday with the manufacturing data out of the US the economy is fragile and far from on a steady growth pattern. In fact yesterday's US PMI showed the energy dependent manufacturing sector is now in the contraction phase.
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 mixed heading into the US trading session as shown in the following table.
Dominick A. Chirichella
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