The new spot June Nymex Nat Gas contract has mostly followed the trading pattern of the expired May contract over the last several trading sessions. The June contract also made several passes at breaching the upper range resistance level of $4.40/mmbtu and also failed. So far this morning in overnight trading the market is starting out on a positive note and is now sitting in about the middle of the trading range. Technically the market is suggesting a range bound trading pattern for the short term as traders and investors look toward the fundamentals for more medium term guidance.
Although a lagging indicator the latest CFTC Commitment of Traders (COT) report show that speculators are holding the largest net long position in quite some time on both Nymex and ICE. The COT report released on Friday is based on a snapshot of positions from the previous Tuesday… thus the lagging part of my statement. With some of the selling coming during the second half of the week some of the aforementioned net longs could have exited the market since the report basis was established.
The main fundamental feature currently in the market is simply that fact that the industry is now in the lower demand shoulder season with minimal pockets (if any) of Nat Gas heating related demand with cooling driven Nat Gas demand getting off to a slow start compared to last year's early and hot spring. Absent any other fundamental features the demand side of the equation would certainly portray a weak short to even medium term signal.
However, the offsetting fundamental factor is the lower than normal inventories compared to last year and the more normal five year average. This has limited aggressive selling as market participants remain cautious of possible unscheduled events that could result in a shirt term jump in Nat Gas demand as we saw with the Georgia coal power plant outage several weeks ago. This week the EIA will release its inventory on its normal schedule and time... Thursday May 2nd at 10:30 AM.
This week I am projecting the third injection of the season of 30 BCF into inventory. My projection for this week is shown in the following table and is based on a week that experienced a low level of above normal temperatures during the report period. My projection compares to last year's net injection of 31 BCF and the normal five year net injection for the same week of 67 BCF. Bottom line the inventory deficit hold steady this week versus last year but the deficit will widen compared to the five year average if the actual numbers are in sync with my projections. This week's net injection will be supportive when compared to the historical data.
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If the actual EIA data is in line with my projections the year over year deficit will come in at about 808 BCF. The deficit versus the five year average for the same week will widen to around 131 BCF. The early market consensus is projecting the third injection of the season in the range of 25 BCF to 40 BCF.
As discussed in the newsletter two weeks ago I suggested that the oil complex was in the early stages of forming a technical bottom pattern. I also said this was the second try at forming a bottom in the month of April with the first attempt in the beginning of the month. The first try failed but so far the second attempt has been successful pushing all of the commodities in the complex into a new higher trading range or the range that was in play during the first half of April. At the moment the complex is still in a recovery trend that has been driven more by short covering rather than by a surge of new longs moving back into the market. From a technical perspective the market is still trading in the higher trading range but it is starting to look like the upside momentum may be starting to lessen over the last two trading sessions.
The main negative driver for the oil complex has been the disappointing macroeconomic data that has hit the media airwaves during the month of April. The vast majority of the economic data continues to suggest that global economic growth is slowing and thus global oil demand growth is also likely to slow in sync with the slowing economy… especially in the emerging market area with China in the lead. The most recent data point was released on Friday when the US Commerce Department reported that US GDP increased to 2.5 percent but less than the market was expecting for the first quarter. The market was expecting GDP at 3 to 3.2 percent for Q1. In addition US consumer sentiment declined to the lowest level in three months with the final reading for April coming in at 76.4 compared to March at 78.6. The data out of Europe last week was even more negative than the US data suggesting that the entire EU is falling deeper into contraction with Germany now on the cusp of dipping back into recession for the second time in five years.
This week the economic calendar is full with market moving economic data hitting the airwaves almost every day. Some of the main data points include China's PMI data, the minutes from the last US FOMC meeting, Thursday's ECB announcement and press conference with the ever important US nonfarm payroll report on Friday. In addition there will be reports on personal spending, PMI data from the US and other major countries around the world and consumer spending along with auto and truck sales. All of the major data points that will be issued this week are likely to be scrutinized very carefully for any and all signals as to the state of the global economy and the implication it may have on oil consumption going forward.
The oil complex ended modestly higher across the board last week with the Brent/WTI spread narrowing strongly compared to the end of the previous week and thus narrowing by 11.42 percent or $1.30/bbl. Crude oil led the refined products markets higher on the week resulting in all of the crack spread combinations also narrowing on the week.
I am maintaining my view at neutral for Nat Gas and maintaining my bias back at neutral even though the spot Nymex contract is continuing to trade above the $4.16/mmbtu level. The market failed for the third day in a row to breach the $4.40/mmbtu resistance and then turned to the downside since failing yesterday. That is a bearish signal and one that suggests that the market may now test the lower $4.16/mmbtu support level.
I am maintaining my view of the entire complex at a neutral with a cautiously bullish bias the short term price recovery in oil over the last week or so short could extend further. Global demand growth is still looking like it is turning to the downside. Brent & WTI both breached their range resistance levels suggesting further upside potential in the short term.
Markets are mostly higher at the start of the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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