After a day of good macroeconomic data out of the US the political circus in Washington DC ended the day by cancelling a vote on Plan B with both the Senate and the House of Representatives now in recess until after the Christmas Holiday. The market is now left trying to figure out if this means a deal to avert the fiscal cliff will not get done or one will be completed but not unit the very last minute. The one thing Santa Claus is not bringing for Christmas in the US is clarity as the cloud of uncertainty got even larger after last evening's performance of the Grinch who may be stealing the US economic recovery. Oil and most all risk asset markets immediately sold off on the news last night and have been in negative territory throughout the evening trading session... although the equity markets are off of the extreme lows hit shortly after the news broke.
As I have been discussing for over a month the market will remain susceptible to the 30 second news snippets for direction and the latest news was certainly bearish for all risk asset markets... or at least that is the current market interpretation. With the holiday period upon us and with little in the way of macroeconomic data the rest of the year will be dominated by whether or not the US politicians will be able to put a deal together before the fiscal cliff trigger data of January 1, 2013.
There are six trading sessions left in 2012 (counting today) and 10 days until the trigger date. Liquidity will be low, volatility will be high and risk asset markets will remain susceptible to sudden price reversals on any news snippet that emerges on the fiscal cliff negotiations. I am still of the view that a deal of some sorts will be done and the worst of the fiscal cliff will be avoided. It may not be the best deal in town nor one that will ultimately be good for US economic growth... but that is next year's storyline. However, I expect both sides will come to their senses and agree to something to avoid being blamed for sending the US economy into a downward spiral.
As expected the Nat Gas market has not been overly impacted by the no vote as have most all other risk asset markets. Nat Gas continues to be primarily driven by the actual weather as well as the short term temperature forecasts. The latest NOAA six to ten day and eight to fourteen day forecasts have been supportive. The forecasts have stayed steady for the last few days indicating that the weather models may be starting to indicate that the temperature patterns are finally beginning to change.
The forecasted weather pattern is now suggesting that more winter like weather may be engulfing a major portion of the US. If the actual temperatures do come in as forecasted Nat Gas heating related demand will begin to approach more normal levels for this time of the year. In addition consumption versus last year should be significantly higher as last year was a very mild winter especially the second half of the winter. As such the current small surplus in inventory versus last year should diminish quickly and move into a deficit position by early January.
In the latest EIA weekly Nat Gas report total demand for the report week was essentially flat. According to Bentek estimates, overall natural gas consumption for the nation fell by 0.2 percent. The residential/ commercial sector, which is the biggest gas-consuming sector during the winter, consumed 0.8 percent more gas week-on-week. This was offset by a 2.5 percent decrease in natural gas consumption in the electric power sector. Texas and the Midcontinent saw big drops in consumption for gas for power generation, falling 20.5 percent and 24.7 percent, respectively, likely driven by warmer average temperatures. The Northeast and the Southwest, both substantial consumers of gas for electric generation, consumed 6.3 percent and 10.1 percent more gas than the last report period, respectively, although net U.S. gas consumption in the electric sector was still down.
Total supply for the report week showed a slight increase. Bentek estimates an overall supply increase of 0.6 percent for the report period, driven by increased production. U.S. gross and dry natural gas production were up 0.7 percent week-on-week. Imports from Canada were up 0.6 percent. They increased most substantially in the West where temperatures in Oregon and Washington were low relative to the previous report period.
I am maintaining my Nat Gas view at neutral as well as my as the fundamentals and technicals are now suggesting that the market may be range bound in the higher trading range for the short term. I anticipate that the market is now positioned to remain in the new higher trading range... as the latest temperature forecast is once again more 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 in the heart of the winter heating season and currently those forecasts are back to switching to a more neutral to supportive scenario.
I am maintaining my view at neutral and maintaining my bias to cautiously bullish as the current fundamentals are still biased to the bearish but the forward view of 2013 fundamentals are starting to look more supportive. In addition the technicals are indicating that the selling momentum has eased as the market is has now moved into a higher level trading range 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. But as discussed above the market seems to be paying less attention to the nearby fundamentals. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. This is still an event driven market for oil at the moment.
Markets are mostly lower as shown in the following table.
Note: Today will be the last publication of the Natural Gas Market Analysis for 2012. Publishing will resume on Wednesday January 2, 2013.
I do want to take this opportunity to thank all of you for subscribing to the newsletter . I hope you enjoyed reading the daily report as much as I have enjoyed writing it. 2012 was yet another tumultuous year but one that was laden with many opportunities in the energy world. 2013 is likely to be even more interesting. I look forward to conversing with you all in 2013.
I also wish all of you a very happy holiday season and an extremely healthy and happy 2013.
Dominick A. Chirichella
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