Nat Gas futures have been under strong selling pressure since the markets began trading on Sunday night. The main selling catalyst today is the even more bearish short term temperature forecasts that hit the media airwaves over the weekend. As I have indicated on many occasions the weather is the primary price driver for the Nat Gas complex with the weather now making another decided turn toward the bearish side.
The latest NOAA six to ten day and eight to fourteen day forecasts are both showing major areas of the US expecting below normal temperatures through August 11th with only the west coast likely to experience above normal temperatures. This is a bearish forecast during a time when summer cooling demand for Nat Gas is normally at its peak. The current round of forecasts are certainly a change to the heat wave experienced along the north east coast two weeks ago and one that is likely to result in only a minimal call on Nat Gas for weather related power generation demand.
From a technical perspective the market finally breached the lower range support level of $3.58/mmbtu after trading in the $3.58 to $3.80/mmbtu trading range since the third week of June. The spot Aug contract expires today with September taking the reigns as the spot contract. September futures have also been hit with strong selling and are also in a new trading range with $3.41/mmbtu the next support level with $3.52/mmbtu the upper resistance level.
The Nat Gas market has now retraced all of the gains it achieved during the late winter/early spring rally and is now trading back at a level not seen since the first half of February. Going forward the weekly inventory injections are likely to start to move into an over performance pattern and thus result in the deficit gap versus both last year and the five year average to narrow. This week's injection is likely to be the last underperformance versus the five year average as the remnants of the heat wave are still impacting this week's data.
Tropical Storm Dorian fizzled out over the weekend and is now just a tropical weather pattern a couple hundred miles north of the Leeward Islands. At the moment this weather pattern only has a medium (50 percent) chance of once again becoming a tropical cyclone during the next forty eight hours. Currently this storm does not appear to be a threat to the oil and gas producing operations in the US Gulf Coast.
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This week the EIA will release its inventory on Thursday, August 1st at 10:30 am. This week I am projecting the third underperformance of the injection level 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 above normal temperatures during the report period. My projection compares to last year's net injection of 28BCF and the normal five year net injection for the same week of 47 BCF. Bottom line the inventory deficit will narrow this week versus last year but slightly widen versus the so called more normal five year average if the actual numbers are in sync with my projections. This week's net injection will be neutral when compared to the historical data.
If the actual EIA data is in line with my projections the year over year deficit will come in at about 377 BCF. The deficit versus the five year average for the same week will widen to around 43 BCF. The early market consensus is projecting the eleventh injection of the season in the range of 40 BCF to 60 BCF with the consensus still forming.
After falling modestly for the first week in over a month oil prices are starting the new trading week in positive territory for WTI with Brent showing a larger gain. Refined product prices are also modestly higher as of this writing. The market began to run out of its upside momentum early last week as participants have raised their concern on the prospect for a faltering demand picture going forward.
The main oil demand growth engine of the world… China is showing signs of its economy switching into a slower growth mode than what has been experienced over the last decade. Over the last several weeks the macroeconomic data out of China has been disappointing especially for the manufacturing sector with the energy sensitive PMI Index now dropping into the contraction zone. This coupled with the latest order by the government to shut down surplus manufacturing capacity will certainly have a negative impact on oil demand going forward. Overnight the government also ordered a debt review by the National Audit Office on an urgent basis. There will be more to this story going forward.
On the OPEC front with demand slowing OPEC is likely heading into a very important meeting in December as they address demand issue as well as the rising production in non-OPEC countries… especially the US. Yesterday a Saudi Prince and business man… Saudi Prince Alwaleed told Oil Minister Ali Al-Naimi in an open letter that the kingdom won't be able to boost its output capacity to 15 million barrels a day as planned and that rising U.S. production from shale formations may reduce American demand for imported crude as reported in a Bloomberg article today.
The prince published the letter yesterday on Twitter, saying there's a "clear and increasing decline" in demand for crude from members of the Organization of Petroleum Exporting Countries, particularly Saudi Arabia. The kingdom is now pumping below capacity as consumers cut imports, Alwaleed said.
This week's economic calendar is very active especially in the US with the ever important US nonfarm payroll data hitting the media airwaves on Friday. In addition the US Federal Reserve FOMC will meet this week with their rate decisions announced on Wednesday. The Fed is expected to remain status quo at this meeting but as usual the market will be parsing every word of the announcement to see if there are any new indications as to the plan for QE3 going forward.
Many of the global equity markets in the developed world… including the US have been primarily driven by the massive amount of stimulus coupled with near zero short term interest rates for the last several years. We are currently in a period where the easy monetary policies are likely closer to an ending rather than the beginning. As the Central banks around the world wean the markets off of the easy money policies it is almost certainly to have an impact on equities as well as oil and the broader commodity values. During periods of Central Bank policy transitions the markets are extremely volatile which is likely to be the environment that will be in play over the next six months or so especially in the US.
I am downgrading my Nat Gas view and bias at neutral based to cautiously bearish on a less supportive short term temperature forecast. The fundamental picture is likely to begin to shift as the temperatures across the US does not appear to be moving back to warmer than normal weather.
I am maintaining my view at neutral and bias at cautiously bearish for the short term as the downside correction may continue into next week. I am continuing to fly the caution flag that the current round of profit taking selling could continue for a few more days.
Markets are mixed heading into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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