Nat Gas has been holding up well amidst all of the volatility in the global markets. Since correcting to the downside earlier last week the market is settling into the $2.25 to $2.50 trading range that I have been suggesting. Within this price range Nat Gas prices are much more in line with what the fundamentals are suggesting that the price of Nat Gas should be or in other worlds more in line with its current true value. At this current price level the economics of switching from coal to Nat Gas continues to be favorable for Nat Gas. Based on where Nymex is trading for the spot Appalachian coal and Nat Gas futures contracts Nat Gas is still holding an advantage of $0.392/mmbtu. As I have said in the past this is a macro comparison and does not account for any differences in efficiencies between these two fuels. With the economic advantage still favorable to Nat Gas the additional Nat Gas demand that has been derived from switching will continue to keep the weekly injections at below normal historical levels for the short to even medium term.
That said the main question is still will it be enough of an underperformance in weekly inventory injections to prevent working storage to hit maximum capacity prematurely. Premature meaning prior to the start of the winter heating season when Nat Gas begins to be withdrawn from inventory. If not the industry will be forced to cut both economical and uneconomical production levels based on infrastructure limitations rather than based on an economical optimization driven by the industry. Dry gas production is not economical at current price levels but wet production...rich in NGL's is still economical even with oil prices declining over the last several weeks. The industry is far better off optimizing their own systems and cutting out any uneconomical production wherever they can to avoid forced cuts as the industry approaches maximum workable storage capacity.
I still expect the industry to remain in control of their own operations rather than operating based on infrastructure constraints. The latest production cuts reported by the EIA have been a tad more than earlier reports but still not significant enough to assure the market that the overhang currently in inventory is going to continue to narrow enough to avoid prematurely hit maximum storage capacity.
Certainly the demand side of the equation coming from weather related demand can also contribute to getting this market more in balance. But as we all know the weather is always a work in progress. From the tropical weather side of the equation the latest forecasts from NOAA and the private forecasters are calling for about a normal tropical season. However, it does not mean that there will or will not be any damaging hurricanes hitting the US Gulf of Mexico and forcing production shut-ins. That is a variable that only time will tell.
On the temperature front the latest six to ten day and eight to fourteen day forecasts are both calling for above normal temperatures throughout most of the US with the exception of the west coast and Florida. I would expect some cooling related Nat Gas demand over this forecast period but it will have to be more severe than last year's weather to result in a significant impact on the weekly injections compared to last year and the five year average.
A lot of variables with few certainties for this market over the next month or so. That said I remain positive but still overall neutral to the flat price in the front end of the curve as I do not think there is enough momentum from either direction to move this market out of the aforementioned trading range in the short term. I am still long the winter, 2013 intermonth spreads and remain comfortable with that position.
This week the EIA will release the weekly Nat Gas inventory report on its regularly scheduled day and time...Thursday, June 7th. This week I am projecting the eleventh net injection into inventory of 50 BCF. My projection for this week is shown in the following table and is based on a week that experienced some cooling. My injection forecast is based on the fact that only minimal cooling related demand occurred last week. My projection compares to last year's net injection level of 99 BCF and the normal five year average net injection for the same week of 81 BCF. Bottom line the inventory surplus will narrow again this week versus last year and the five year average if the actual data is in sync with my projections
If the actual EIA data is in line with my projections the year over year surplus will narrow to around 701 BCF. The surplus versus the five year average for the same week will narrow to around 675 BCF. This will be a bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are forming in a wide range of about 40 to 85 BCF.
I am keeping my view at neutral and keeping my bias at neutral with an eye toward the upside now that Nat Gas has moved back to much more representative levels that are in sync with current fundamentals. The surplus is still narrowing in inventory versus both last year and the five year average but could lead to a premature filling of storage during the current injection season. However, I now believe that we may see other producers starting to signal a cut in production. We may still see lower prices (thus the basis for my bias) but I think the sellers are losing momentum.
I am keeping my view at cautiously bearish after oil broke down on all fronts once again both WTI and Brent are trading at levels not seen since the fall of 2011. Oil is still solidly below the trading range it was in just a few weeks ago and well below several key support areas yet again. WTI is still solidly trading in double digits with Brent now below the $100/bbl mark. The trend remains downward but oversold.
With all else around it still experiencing a high degree of selling pressure the oil complex scratched its way into positive territory on Monday and well off of the intraday lows made during Asian trading hours. From a technical perspective it was a strong intraday reversal and one that should at least get some level of follow through during Tuesday's trading session. Nothing actually changed since Friday with the risk in Europe as high as it has ever been with all signs continuing to point to a slow growth global economy at best. Equities in Europe and the US also recovered a major portion of their earlier intraday losses.
All of the asset markets remain clearly in an event driven pattern with technicals and fundamentals acting as a secondary price driver especially during periods when event risk is at its highs...like the current timeframe. The two main events that just about every trader and investor is currently fixated on is whether or not the US Federal reserve will institute some form of a new quantitative easing program at the upcoming June 19-20 meeting and/or will the EU come up with a solution at their June 28-29 meeting. In addition the second Greek elections in six months take place on June 17th. Also the third round of talks between Iran and the West will occur in Moscow on June 18-19th. The 30 second news snippets between now and each of these events will be hitting the media airwaves every day and will impact the market in both directions. These are the main market events that will hold the top spot. June can clearly be characterized as event month.
Along with the aforementioned events there will be the ongoing macroeconomic data from around the world with all participants trying to glean any sign that the major economies...US, Europe and China in particular are starting to bottom and turn the corner to a more robust expansion phase. I am not very confident that we are going to see any macroeconomic data in the short term that is going to show anything other than slow growth at best.
I expect this week to continue to trade with a high level of volatility. I do not expect any definitive answer (this week) to the main events outlined above although Chairman Bernanke is testifying before Congress on Thursday and he may give some hints as to his thinking heading into the June 19-20th FOMC meeting. One thing you can be certain of is the market will parse every sentence with views and interpretations floating around the media airwaves throughout his testimony. Technically oil and the main equity and commodity markets remain very oversold. The markets are due for a short covering rally at some point in time.
Normally most short covering rallies are associated with an event as the catalyst or in the case of the current market environment even the perception of an event can result in a significant short covering rally. A short covering rally will occur but be aware that markets can remain oversold for an extended period of time so even though the market is currently oversold it does not mean a short covering rally will happen immediately. It may happen 1 hour or a week or month. If the downward trend remains strong the oversold condition of the market will remain in place for an extended period of time.
Currently markets are mixed as shown in the following table.
Dominick A. Chirichella
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