The spot Nat Gas futures market is performing much as I expected and discussed in yesterday's newsletter. The market has traded mostly in positive territory since about 8:30 AM. At the moment the market has been retracing off of the intraday highs and is trading around the unchanged mark for the session. The way the market has traded after yesterday's sell-off continues to suggest to me that the bulls are getting tired of waiting for a winter price surge and are gradually in the process of moving to the sidelines.
I don't think the market is done for the day yet and we may get another wave of short covering as we are heading into a three day weekend in the US (Presidents Day on Monday). I also do not think the market will solidly breach the new resistance level of $3.20/mmbtu today either. Unless we get a strong bout of winter for a sustained period of time I still view the market as likely to remain in the new trading range of $3/mmbtu to $3.20/mmbtu.
Next week's EIA inventory report (will be issued on its regular schedule and time in spite of holiday on Monday) is likely to be bearish after a mild week along much of the east coast. The early projections are calling for a net withdrawal in a range of about 120 BCF to 155 BCF compared to last year's withdrawal of 155 BCF and versus the five year average for the same week of 145 BCF. Obviously the report will be bearish if the number falls within the range. I will issue my forecast in Tuesday's newsletter.
In the latest EIA Weekly Nat Gas report the U.S. Energy Information Administration's (EIA) most recent monthly production data indicates that total U.S. average daily marketed production reached 70.4 billion cubic feet per day (Bcf/d) in November 2012, 0.4 Bcf/d above the previous month, with upticks in the federal Gulf of Mexico, Oklahoma, Wyoming, and the category for other states, which includes Pennsylvania. Production in the Marcellus Shale areas of Pennsylvania and West Virginia is expected to continue rising, as recently drilled wells become operational. Despite relatively low natural gas prices, Pennsylvania drilling continues at a strong pace as producers target combination oil-and-gas wells. According to EIA's recently released Short-Term Energy Outlook for February, projected marketed production increases from 69.2 Bcf/d in 2012 to 70.0 Bcf/d in 2013, and remains flat in 2014.
According to estimates from BENTEK Energy Services LLC (Bentek), average natural gas consumption for the nation fell this report week by 8.4 percent over last week's daily average. Natural gas consumption decreased in all sectors and most notably in the residential/commercial sector, which fell by 13 percent for the report week. This is the result of warmer weather in most parts of the country compared with the previous week.
Bentek estimates that the average daily natural gas supply for this report week increased modestly by 0.4 percent over the previous week's daily average. Dry natural gas production increased by 0.6 percent above the previous week and sufficiently offset the decrease of natural gas imports, which fell by 3 percent over the same period.
The oil complex is starting the session in negative territory except for the spot Nymex RBOB contract which soared yesterday. Market participants have been concerned that gasoline supplies may be an issue heading into the upcoming summer driving season as production declines as the industry enters the spring refinery maintenance season. I am not sure I am totally on board on the gasoline supply issue as inventories are slightly above both last year and the five year average and we did not have any supply issues last year and did go through the same level of refinery maintenance programs last spring.
In addition the US has been exporting around 500,000 bpd of gasoline... mostly out of the US Gulf Coast. With the expansion of the Colonial pipeline progressing if any gasoline is needed on the East Coast due to the closure of Hess's Port Reading refinery those supplies could then be easily diverted. In addition with the EU economy sluggish at best their will be ample availability of supplies of gasoline out of Europe for movement to the US east coast if needed. For now I view the current price move in gasoline as very speculative and not driven by the current fundamentals or even the projected fundamentals for that matter. Certainly one needs to ride the trend in trading but I would caution that the RBOB gasoline price is overdone, way ahead of the fundamentals and susceptible to a round of profit taking selling.
The main feature over the last twenty four hours has been the negative growth data coming out of both Japan and the EU. The data resulted in a decline in the euro, an increase in the US dollar and thus a negative backdrop for equities, oil and the broader commodities complex. That said the selling was not intense by any measure with market participants somewhat discounting the data by the afternoon session in the US on Thursday. Part of the view comes from the fact that GDP data is a lagging indicator (Q4 in this case) and may not be truly representative of the economic status going forward. In fact a lot of the more forward looking macroeconomic data has been positive and indicative that the EU economy is in fact starting to make progress.
The G20 meeting is underway in Russia with many market participants looking to see if there will be any further guidance from the major countries regarding the growing concern over the potential for a currency war. Earlier in the week the G7 countries issued a joint statement indicating that there would be no currency manipulation. This meeting the delegates are trying to find a common ground on currencies so as to reassure the market that all is under control.
Most of the concern revolves around Japan's current aggressive approach with monetary stimulus to try to move their economy out of the doldrums it has been in for the past 15 to 20 years. The result of large money printing operations to bolster an economy is a debasing of the local currency... the Yen in this case. With Japan primarily an export driven economy a devaluing of the Yen is a very favorable outcome for the exporting companies but in a world of slow growth those exports have to be at the expense of someone else's market share. The Yen is down by about 12% in just the last three months and that has raised concerns in other developed and developing world economies as they see an exposure to their export market share.
I do not expect anything earth shattering or something that results in a major market move in either direction from the G20. Rather I expect the communiqué to be mostly in line with the statement that has already been issued by the G7 countries this past Tuesday. Japan will continue to embark on an aggressive quantitative easing program as the US and other major developed world countries have been embarking on for several years. With growth in the developed world barely growing there is no way that the Central Bankers are going to take their foot off of the QE pedal anytime soon.
I am maintaining my Nat Gas view and bias at cautiously bearish as the weather forecasts and nearby temperatures remain bearish. 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 bearish at the moment.
I am maintaining my view of WTI at neutral to cautiously bearish and maintaining my view for Brent at neutral to cautiously bearish. That said I am continuing to fly the caution flag as any additional equity market corrections will impact oil prices in much the same way... a round of profit taking selling. Furthermore the spot Brent contract has breached its technical resistance level of about $118/bbl suggesting lower prices in the short term.
Markets are mixed as shown in the following table.
Note: I will not be publishing the daily Nat Gas Market Analysis newsletter on Monday in observance of the Presidents Day holiday.
Dominick A. Chirichella
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