The post EIA inventory rally continues for a second day as the spot Nat Gas futures contract has remained above the key $3.50/mmbtu level for the second day in a row. On the premise that the market settles above the new support level of $3.50/mmbtu we may see another new leg to the upside in the short term. Again I will caution the futures market has struggled to remain above the $3.50/mmbtu since early November of last year having failed each time it has moved above it.
The latest NOAA weather forecast is still supportive but as the forecast moves deeper into March the support is beginning to show signs of wavering as the area of the US expecting colder than normal temperatures is getting smaller and thus Nat Gas related demand for heating is going to slowly start to return to normal levels. With normal quickly moving toward "spring like normal" Nat Gas demand is going to decline. As it does inventory withdrawals will also quickly decline and start the switch over into the injection season as the shoulder season takes hold.
Historically (basis the five year average and last year) the injection season tends to begin in the middle to the end of March (depending on how quickly winter moves out) or around the start of spring. With the current weather forecast starting to moderate and with the Nat Gas futures forward curve in a modest contango starting with the spot contract the market will begin to inject gas into inventory as soon as possible (basis winter demand diminishing). Thus there is max only about three more inventory reports that may show net withdrawals but with each withdrawal likely below the previous one as winter like weather diminishes.
As it looks right now if the rest of the month performed like the five year average end of season inventories would come in around the 2 TCF mark. If the cold persists it could end closer to the 1.9 TCF level. In either case it would still be above the five year average but below last year. The injection season will start with more gas in storage than the normal five year average starting level increasing the possibility of inventories hitting near record high levels prior to the start of the next winter cycle.
In addition coal prices are trading at a three week low while Nat Gas futures are at a six week high. Coal to Nat Gas switching definitely continues to economically favor coal (has been the case since fourth quarter of last year). Not only will there not be much of any additional Nat Gas demand to replace coal for power generation it will continue to move in the opposite direction with less gas and more coal usage for power generation. Nat Gas demand to offset coal related power generation will be well below last year's levels and more in line with levels seen several years ago. Obviously this is a negative for the Nat Gas market as supply is more likely to outstrip demand and thus ultimately have a negative impact on prices in the medium term.
In the latest EIA Weekly Nat Gas update New York and New England prices rose, they did not reach the same peaks they reached earlier this year. Already comparatively elevated at $7.76 per MMBtu at the beginning of the report week, the price at the Algonquin Citygate (which serves Boston consumers) dropped in the middle of the week to just under $5 per MMBtu, and rose back to end the week at $7.77 per MMBtu. At Transcontinental Pipeline's Zone 6 trading point for delivery into New York City, prices rose from $3.85 per MMBtu last Wednesday to $4.66 per MMBtu yesterday. In contrast to this report week, in January 2013 prices at both of these trading points spiked to more than $30 per MMBtu during a cold snap.
Both demand and supply declined this week. According to BENTEK Energy Services LLC (Bentek) data, dry production declined by 0.4 percent from last week, but remains 0.7 percent above levels a year ago. Pipeline imports of natural gas from Canada declined across the board. While LNG sendout increased from the previous week, sendout still remains at minimal levels, averaging 281 MMcf per day. Domestic consumption fell 3.8 percent from last week, with decreases in the residential and commercial, power burn, and industrial sectors. Despite the overall decline in consumption of natural gas for power generation, the Midwest saw large increases beginning Sunday.
RBOB is higher for the second day in a row while the rest of the complex is now in negative territory. The oil complex is certainly not participating to the fullest extent along with the equity markets which have hit new all time highs in both Europe and the US. WTI has separated itself form Brent for the last several days as the Brent pipeline system resumes production sending the Brent/WTI spread down strongly and now trading below the range support level that has been in play since early February. The entire oil complex is in a technical bottoming pattern with some of the commodities in the complex ahead of others.
Oil market participants have been very cautious over the last month or so as the global economy continues to grow at a slow pace but with signs that certain regions may be starting to pick up a bit... like the US. However, even with the global equity markets staging a modest recovery rally over the last several weeks there are no clear cut signs that all of this is going to translate into a growth spurt in oil consumption anytime soon.
Next week the three oil forecasting agencies will release their monthly oil projections. Last month the IEA lowered its projected oil consumption for 2013 by 90,000 bpd. I am of the view that the three agencies will likely keep their forecasts at the same levels as last month with a possibility of even lowering the forecast a tad as GDP data since the last report has not shown any noticeably signs of improving over the previous period data. Although equity markets in several regions of the world are hitting new highs that does not translate directly to an increase in oil consumption... but it does often act as a leading indicator for what the state of the economy will be looking like down the road.
On the supply side of the equation there are currently no shortages of oil anywhere in the world at this time... nor does it look like a shortage will crop up anytime soon. The North Sea has returned to normal for both Brent and Forties and with the exception of the force majeure by Shell for their Bonny Light production the global oil situation is more than balanced right now.
Thus from a fundamental viewpoint oil is currently neutral to even slightly bearish which is the main reason why oil prices have not been fully participating alongside equities in the upside rally. As mentioned above from a technical perspective the complex is forming a bottom and could eventually participate more completely to the upside assuming equities continue to push higher.
Overnight there was mixed economic data out of China as the annual leadership meeting continues. China posted a surprise trade surplus in February versus a projection for deficit. On the oil side the main oil demand growth engine of the world saw its net crude oil imports decline to the lowest level in five months. Imports dropped to 5.4 million barrels per day according to figures posted on the website of the General Administration of Customs today. This is contributing to my view that the three main agencies will keep their oil consumption projections unchanged at best in next week's rounds of reports. There was minimal reaction in Asian trading to the data.
The latest GDP data out of Japan showed that this major exporting economy returned to growth in Q4. GDP rose an annualized 0.2 percent in Q4 compared to an earlier reading showing a 0.4 percent contraction. I would say that the declining Yen has given many of the major export companies a boost. It is also a sign that aggressive easing may be finally starting to work. The outcome is likely to also be supportive for even more aggressive easing as the new BOJ head takes over the reins. The aggressive easing by Japan, US and the UK are all supportive for global commodity prices... including oil.
The US nonfarm payroll data we 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.
The US employment situation has taken on an elevated level of importance by the market as the US Fed has linked much it its monetary policy... including their massive money printing operations to the state of the jobs market in the US. With a much better than expected outcome today the market will be watching the next Fed monthly meeting for any signs that the Fed might potentially end its quantitative easing program sooner than originally expected. If so the US dollar would rise and oil and most other commodity prices would likely decline further from current levels.
I am adjusting my view to 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 higher as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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