Nat Gas futures continue to trade above the $3.50/mmbtu breakout area (now support) suggesting that the market may be in the the early stages of a new leg to the upside. The market is currently going through a very light round of profit taking selling but the futures market still remains technically supported at the moment. If the market is able to get through the $3.66/mmbtu resistance level the next upside testing area would be around the $3.75/mmbtu level. From a technical perspective the Nat Gas futures market remains in an uptrend that has now been in play since bottoming in mid-February.
From a fundamental viewpoint inventory withdrawals since the beginning of this year have continued to experience larger net withdrawals than last year. This has resulted in total Nat Gas in inventory moving into a deficit position versus last year by 14.8% and thus keeping the Nat Gas futures market in a modest uptrend for the last month or so. At the moment it looks like this inventory trend could last another few weeks and thus help to keep futures prices above the new $3.50/mmbtu support level. This week's inventory report will be bullish versus last year and the five year average as the net withdrawal will be greater than the historical data for the same period.
This week the EIA will release its inventory on its normal schedule and time... Thursday March 14th at 10:30 AM. This week I am projecting an average withdrawal of 120 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced an above normal level of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 66 BCF and the normal five year net withdrawal for the same week of 74 BCF. Bottom line the inventory deficit will widen modestly this week versus last year while the surplus will narrow compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be bullish when compared to the historical data and as of today the market seems to starting to price that outcome into the futures market.
If the actual EIA data is in line with my projections the year over year deficit will widen to about 482 BCF. The surplus versus the five year average for the same week will come in around 149 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a range of 90BCF to about a 150 BCF net withdrawal with the market consensus still forming.
The latest macroeconomic data out of China overnight shows that the main economic growth engine of the world is still growing but not at the pace many expected it would be growing by now. China's industrial production increased by 9.9% in the first two months of 2013 but it is the weakest start to a year since 2009. Retail sales increased by 12.3% but it was below the market consensus of around 13.8%. The new leadership now takes the reins with growth showing signs of slowing while inflation pressures are starting to build. As I have been indicating the pace of growth of the Chinese economy is not going to result in a growth spurt in oil consumption over and above what has already been projected anytime soon.
This week the three main reporting agencies (IEA,EIA and OPEC) will all release their monthly forecasts for 2013 and beyond. OPEC and the EIA will release their reports on Tuesday while the IEA report will hit the media airwaves on Wednesday morning. Last month the most notable outcome was the 90,000 bpd reduction in the IEA's global oil consumption projection for 2013. This round I expect all three agencies will keep their forecast in line with last month's forecast as there are no signs that the global economic growth pace has changed much since last month.
On Friday the US jobs outlook came in much better than most investors and traders were expecting. The US nonfarm payroll data was a huge miss to the upside showing the creation of 236,000 new jobs with the unemployment rate declining to 7.7 percent. This is a huge positive for the US economy and one that shows that the economy is still growing and not following the sluggishness seen in Europe.
With the unemployment situation taking on an elevated level of importance in the US Central Bank's policy making Friday's data has raised the question (as expected) as to the Fed's exit strategy... has it changed. I do not think so and I expect the Fed to continue under its current plan of a very easy monetary policy as long as the unemployment rate remains above 6.5 percent and inflation is below 2 percent. Currently we are not near either of these thresholds.
Gasoline prices have been rising strongly over the last week or so but not due to the normal reasons of higher crude oil prices of geopolitics. Prices are rising as refiners are caught in a dilemma as to the use of ethanol. With gasoline demand steadily declining for the last four or five years and with the government mandate for using ethanol as a blend stock in gasoline increasing the industry is at the point where they can't add enough ethanol to meet the government mandate or else they would begin to violate car makers warranties regarding the maximum amount of ethanol in gasoline.
If refiners do not blend in the mandate amount of ethanol they must purchase renewable fuel credits... known as Renewable Identification Numbers or RINS. RINS prices have been spiking as the demand for them is rising due to the aforementioned blending problems. RINS have tripled in the last three weeks from $0.2750/gallon to $0.83/gallon (according to a Reuters article). In the last three trading session the spot Nymex RBOB gasoline contract has risen by around $0.12/gallon while the spot WTI contract is only marginally higher and Brent is down by about $1/bbl. There is no shortage of gasoline, there is no surge in international crude oil prices nor is there a shortage of crude oil any place in the world. Unfortunately the US consume may likely see prices at the pump moving back to an upward trend after leveling off for a few weeks.
I am maintaining my view at cautiously bullish as long as the spot contract remains above the $3.50/mmbtu level. 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 still in the heart of the winter heating season and currently those forecasts have turned a tad more bullish at the moment.
I am maintaining my view of the entire complex to neutral as the oil complex appears to be putting in a short term bottom. I do not think the oil market trend has changed just yet (thus my neutral rating) but it is starting to show the signs of change and thus it is time to be on the alert.
Markets are mixed as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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