The spot Nymex futures contract is settling into the trading range that has now been in play since the middle of April. The market has failed three times to breach the upper range resistance level of $4.40/mmbtu and is now currently inching closer toward a possible test of the lower range support area of $4.16/mmbtu. From a technical perspective the upside momentum that was in place since mid-February has certainly faded while the market does not seem ready for a strong downside correction.
The fundamentals are presenting a mixed picture. First there is underlying support coming from the fact that the surplus of Nat Gas in inventory that has plagued the market for over a year has been completely eliminated. Inventory levels are now below both last year and the five year average for the same week. The fact that total inventories are currently below normal has raised a caution flag for market participants who do not seem ready to engage in an aggressive selling strategy as any unscheduled interruptions as we saw a few weeks ago with the shutdown of the Georgia coal power plant will be met with a quick upside move in prices.
On the other side of the equation the industry is now in the midst of a belated shoulder season with temperatures not cold enough for any significant heating related Nat Gas demand nor hot enough for any cooling related demand. At the moment demand is at its normal low point for the season.
The latest six to ten day and eight to fourteen day forecasts currently support the view that neither heating nor cooling demand will surge anytime soon. The six to ten day forecast is projecting mostly normal spring like temperatures across a major portion of the US with only small pockets of above normal and below normal temperatures. The longer term forecast shows a larger area over the southern part of the country expecting below normal temperatures suggesting that there will not be an early start to the summer cooling season. Through the first week of May we will not be seeing an early surge in cooling related Nat Gas demand like what occurred last year.
So for the moment I remain neutral as the futures market remains within the confines of the aforementioned trading range.
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This week the EIA will release its inventory on its normal schedule and time... Thursday April 25th at 10:30 AM. This week I am projecting the second injection of the season of 40 BCF into inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest level of above normal temperatures during the report period. My projection compares to last year's net injection of 44 BCF and the normal five year net injection for the same week of 50 BCF. Bottom line the inventory deficit will widen this week versus last year as well as the deficit 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.
If the actual EIA data is in line with my projections the year over year deficit will widen to about 797 BCF. The deficit versus the five year average for the same week will come in around 84 BCF. The early market consensus is projecting the second injection of the season in the range of 20 BCF to 50 BCF.
Firming equity markets in the US were enough to bolster oil prices after their negative start on Tuesday reversing the selling from the decline in China's PMI data. The oil complex has been under pressure for the last several weeks as the market focuses on a weakening oil demand scenario on the back of a slowing global economy. Most of the macroeconomic data hitting the media airwaves over the last several weeks has been suggesting that economies in both the developed and emerging market world may be heading for a period of slowing… even the main economic and oil demand growth engine of the world China.
That said several equity markets around the world have been continuing on an upward path suggesting that those particular regions of the world may not be slowing but in fact actually still expanding. When I look at the individual bourses in the EMI Global Equity Index table the equity markets that are in positive territory for the year are all in developed world countries while the emerging market countries listed in the Index are showing year to date losses. In addition most of the gainers are in countries that have very accommodative monetary policies including aggressive quantitative easing programs like Japan and the US (the two largest equity gainers in the Index).
Thus the gains in equities in the aforementioned countries suggest to me that the it is the accommodative and aggressive easy money policies that are driving inventors into equity risk markets rather than a view that equities are rising on the back of a strongly growing economy. For example so far the current corporate earnings season has been highlighting the weakness in Europe for earnings and revenue misses. Of the 150 or so of the S&P 500 companies that have reported earnings so far most companies are missing revenue expectations suggesting that the forward look on where the economy is going is toward the slowing front. Thus the upward movement in selective equity markets seems more driven by QE and low interest rates rather than robust economic growth.
Interestingly oil and equities are relatively correlated except over the last month or so we have seen oil prices not following the strong moves higher in the equity markets that are benefiting from QE type policies. In fact we have seen crude oil prices decline a tad over $10/bbl since the beginning of April mostly being driven by the perception or view that the global economy is slowing and thus oil demand growth may slow even further versus current projected levels. At the moment there is a divergence between the direction of oil prices and selective equity markets.
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 cautiously bearish bias as inventories are starting to build and moving the complex back into a supply driven mode rather than a demand led market. Brent has now breached its range support level again with WTI and refined products not faring any better. The complex is now suggesting that the next move is likely to be a continuation to the downside.
Markets are mostly higher ahead 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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