Nat Gas futures are trading either side of the unchanged level as trading just gets underway in the US. The spot contract broke out of its trading channel to the upside yesterday and so far has remained above the old resistance or now new support level of $3.415/mmbtu. The next resistance level is around the $3.56/mmbtu area. Yesterday's breakout was a combination of supportive short term weather forecasts along with technical buying.
The latest NOAA six to ten day and eight to fourteen day forecasts remain supportive for Nat Gas weather related consumption for the period August 24th through early September. Both forecasts are showing large areas of the country expecting above normal temperatures which should result in an above normal level of Nat Gas demand for power generation to meet cooling needs.
The above said it is the end of the summer and any heat wave is not likely to last for an extensive period of time nor will the temperatures be as high at this point in the summer than in the heart of the summer season. As such the call on Nat Gas for cooling related demand may be above normal but the amount of extra Nat Gas consumed for power generation may not be enough to have a significant impact on the upcoming weekly inventory injection reports. For the moment the anticipation of a heat wave spreading across the country has been enough to push the market into a new higher trading range. It will now be a function as to how the injections evolve over the next few weeks as to high Nat gas prices actually go.
This week the EIA will release its inventory on Thursday, August 22nd at 10:30 am. This week I am projecting an over performance of the injection level into inventory of 71 BCF. My projection for this week is shown in the following table and is based on a week that experienced mostly below normal temperatures over a major portion of the US during the report period. My projection compares to last year's net injection of 43 BCF and the normal five year net injection for the same week of 56 BCF. Bottom line the inventory deficit will narrow this week versus last year while the surplus compared to the so called more normal five year average will widen if the actual numbers are in sync with my projections. This week's net injection will be bearish 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 224 BCF. The surplus versus the five year average for the same week will widen to around 58 BCF. The early market inventory projections are forming in a range of the mid 60's to high 70's with the consensus still forming.
Most risk asset markets… including oil have been drifting lower in overnight trading as global equities were lower across the board along with the US dollar Index. The current externals remain a neutral for oil price direction while oil market participants remain focused on the supply side of the balance sheet. The main areas of concern remain Libya, Egypt, Iraq and the ongoing maintenance programs in the North Sea. The current and potential supply interruptions have kept oil prices firm and in an upward trend since bottoming around August 8th.
Libyan production is still well below normal as some sources have reported that production is running about half of its normal level due to strikes. That said a lot of oil sits in inventory in Libya and if the strikes end oil exports are likely to resume pretty quickly. On the North Sea side maintenance programs do have a finite timeframe and will return to normal. As oil production does in fact return to more normal levels over the next few months coupled with the refinery turnaround season hitting in Europe, Russia and the US crude oil demand will be slowing at a time when production could be returning. As oil market participants look down the road oil balances may be returning to more normal supply and demand levels and as such the fundamental led rally over the last several weeks could start to lose its upside momentum.
The oil market has declined for the last two trading sessions and is starting to show the early signs of topping from a technical perspective. However, the technicals are not strong enough to push the market strongly in either direction as most market participants have placed increased emphasis on the fundamentals for the reasons discussed above.
Global equities have given back most of last week's gains as the market becomes more concerned about what the US FOMC meeting minutes (Wednesday release) will reveal insofar as what the US Central Bank may be thinking insofar as ending its massive quantitative easing program. With the exception of Brazil the rest of the bourses in the EMI Global Equity Index declined over the last twenty four hours. The EMI Global Equity is lower by about 1 percent for the week with the year to date loss widening to 2.3 percent. Only three of the ten bourses in the Index are still showing double digit gains for 2013 with Japan still leading the way higher. Global equities have been a negative price driver for the oil complex as well as the broader commodity markets so far this week. However, the other side of the externals have been a more positive price catalyst. The US dollar index has been trending lower so far this week offsetting some of the negativity coming from the equity complex.
I am maintaining my Nat Gas view at neutral and keeping my bias at cautiously bullish on what seems to be a changing weather pattern to a more supportive short term temperature forecast. The fundamental picture could once again shift if the temperatures across the US do actually move back to large areas of warmer than normal weather as the latest NOAA forecast is currently predicting.
I am maintaining my oil view at neutral and maintaining my bias at neutral for the short term as the downside correction seems to be losing momentum once again. The strong destocking pattern of crude oil in the US Midwest may start acting as a supporting catalyst once again.
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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