NG prices regaining its footing on warm weather

 
on August 21 2013 8:40 AM
Natural gas plant
File picture shows the Las Malvinas natural gas plant of the Camisea project in the Amazon jungle in Cuzco. Reuters

Although the spot Nat Gas contract made a pass at the lower range support level in overnight trading the market has since reversed and is now higher on the session after failing to remain below the technical support level of $3.415/mmbtu. With the tropics completely uneventful and the nuclear power sector running at relatively normal levels the only upside price driver for the Nat Gas market will be the weather as the tail end of the summer evolves.

The latest NOAA six to ten day and eight to fourteen day forecasts remain supportive for weather related Nat Gas consumption over the next several weeks. A late summer heat wave is evolving across the majority of the US. This weather pattern is now expected to be in play starting this week and lasting until the first week of September… at least. About 80 percent of the country will be impacted by the projected above normal temperatures.

The current temperature projections are suggesting that the call on Nat Gas for power generation to meet potential cooling demand should be above normal for the next several weeks and thus should have a negative impact on the weekly inventory injections. Weekly inventory injections have consistently been above last year's injection level since the middle of April thus narrowing the huge deficit gap that formed during the winter heating season. The deficit gap versus last year has recovered from about 800 BCF in April to around 225 BCF if this week's actual data is in sync with my projection. In addition the deficit gap versus the so called normal or five year average has recovered from a shortfall of around 120 BCF to a surplus of almost 60 BCF if this week's actual data is in sync with my projection.

With the current weather forecast the inventory pattern that has been in play for the last several months could be interrupted by a higher than normal call on Nat Gas for power generation. That said the summer is closer to an end than the beginning and as such the newly evolving heat wave will have a limited lifespan with the weather returning to normal and thus injections also retuning back to the over performance pattern with a considerable amount of time left before the start of the winter heating season. As it looks right now Nat Gas stocks should be ample heading into the winter and thus the upward move in prices is likely to be limited unless some other issue… like a hurricane has an impact on the supply side of the equation.

For the moment the market remains in a short term uptrend but one that could lose its momentum very quickly if the weather does not cooperate and/or if weekly inventory injections (after this week's report) do not start to underperform versus the historical timeframe.

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.

Oil prices are drifting lower ahead of this morning's EIA oil inventory report as well as this afternoon's release of the minutes from the last US Fed FOMC meeting. Last night's API report was mixed with draws in crude oil and gasoline and a build in distillate fuel (see below for more details). The market has been retracing this week in spite of the ongoing supply issues in Libya and now in Iraq. Yesterday the strikes in Libya ratcheted up once again with violence in one of the ports and moves to head off attempts by strikers to sell oil themselves at the largest crude oil terminal according to a report by Reuters. However, the Libyan oil ministry said yesterday that two terminals are ready to resume exports. A mixed picture coming from Libya but one that is still evolving.

In Iraq a bombing stopped crude oil flow through the Iraqi to Turkey pipeline today. Two blasts halted the flow of crude oil through the pipeline due to damage to the line. Even though the market has been drifting lower this week the supply issues that have been in play since the latest upside rally started are continuing and some instances (Iraq) are intensifying. Also the ongoing conflict in Egypt and Syria is also adding support to the geopolitical risk premium that has now evolved into the price of oil…especially Brent.

An area that has not retraced this week… the Brent/WTI spread has continued to widen with a strong surge to the upside occurring during yesterday's trading session. As I have been discussing in the newsletter the spread has been in a short term widening pattern since the spread hit parity in mid-July. This pattern is likely to continue until there is a change in the supply problems in places like Libya and Iraq as well as a return to more normal operations in the North Sea which is in its maintenance program.

Further supporting the widening of the spread was a report by Genscape that the Seaway pipeline (a line from Cushing to the Gulf Coast) was shut down due to problems early yesterday morning and as of late yesterday afternoon the line remains shut. The Seaway line has been pumping between 200,000 to 300,000 bpd for the last month or so. The pipeline has started pumping again late last night.

The externals have not been supportive for oil prices this week with the US dollar Index rising while global equity markets continue to move lower. The EMI Global Equity Index lost about 0.85 percent over the last twenty four hours with the year to date loss widening to 3 percent. Seven of the ten bourses in the Index remain in positive territory for 2013 but only three are showing double digit gains… Japan, US and Paris. Brazil remains at the bottom of the list with a loss of 17.1 percent for 2013. Both equities and the direction of the US dollar have been a negative price driver for the oil markets as well as the broader commodity 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.

Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com

Follow my intraday comments on Twitter @dacenergy

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