Nat Gas futures prices have held onto yesterday's gains(so far) as the market sentiment has shifted to a more upside bias mostly on cold temperatures this week. However, the latest NOAA forecast is not overly bullish... let's say neutral. The five day outlook is projecting cold temperatures over major parts of the US which should result in above normal levels of Nat Gas related heating demand for next week's report. However, the latest NOAA six to ten day and eight to fourteen day forecasts the higher demand east coast is projected to experience above normal temperatures for the period February 24th through March 5th. The western two thirds of the country is still projected to experience below normal temperatures. Overall if the actual weather turns out to be in sync with the current projections I would expect a normal level of demand for Nat Gas.
Today is another good example of the independent nature of the Nat Gas trading market. Most commodity market were under strong selling pressure along with modest selling in the financial markets. Nat Gas futures prices move on a combination of their own fundamentals and technicals and is not impacted by the macro moves that have hit most all other risk asset markets.
Today there is less support in the near term from the nuclear sector as the current outage is comparable to last year at this time. Currently 15,100 MW of nuclear capacity is shut-down versus 14,000 MW last year and 10,100 versus the more normal five year average. Not a major factor and now I would categorize it as neutral at best.
From a technical perspective the spot Nat Gas futures contract remains in the $3.20/mmbtu to $3.50/mmbtu trading range that has been mostly in play going back to November of 2012. Today's gain is rather meager and not a very strong follow through from yesterday's short covering rally. It shows that the market sentiment has changed but the upside conviction is not very strong at this time. The market is in a wait and see mode ahead of tomorrow's inventory report. For prices to move to the upper end of the trading range we will have to see a miss to the upside on the withdrawal level... which is currently expected to be bearish versus last year and the five year average... especially since the short term weather forecasts are projecting a warm-up along the east coast starting around February 24th.
This week the EIA will release its inventory on its normal schedule and time... Thursday February 14th at 10:30 AM. This week I am projecting an average withdrawal of 120 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a below normal level of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 155 BCF and the normal five year net withdrawal for the same week of 140 BCF. Bottom line the inventory deficit will narrow modestly this week versus last year and compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will bearish when compared to the historical data but as of today the market seems to have discounted this event.
If the actual EIA data is in line with my projections the year over year deficit will narrow to about 236 BCF. The surplus versus the five year average for the same week will come in around 368 BCF. This will be a bearish weekly fundamental snapshot if the actual data is in line with my projection. The Reuters industry projections are coming in a range of 116 BCF to about a 134 BCF net withdrawal with the market consensus looking for a net withdrawal of 122 BCF.
The minutes from the January 29th-30th Fed policy meeting were released this afternoon. The meeting was a bit of a surprise as the meeting showed that officials worried the central bank's easy-money policies could lead to instability in financial markets and might be hard to pull back in the future. The Fed plans to evaluate how the programs are doing at its next meeting March 19 and 20.
As I discussed in yesterday's newsletter the April Brent/WTI spread failed to breach the upside range resistance level and has traded down toward the $19.70/bbl support level. For those who entered the spread from the short side the market is close to the original objective and if the $19.70/bbl support level holds we could get another move back to the upside. If support is breached the next support level for the spread will be around the $18.25/bbl level.
The Seaway Pipeline operator indicated in a FERC filing that they expect to be able to average about 295,000 bpd flow through the line for the period February through May. They also went on to say that they hope to raise the throughput to 335,000 bpd but it is not expected to increase above that level due to the anticipated mix of light and heavy crude oil. This is slightly bearish for the Brent/WTI spread as it is an increase of movement of oil out of Cushing over January's levels.
Also as I have been indicating the Nymex RBOB contract is very overbought and susceptible to a round of profit taking selling. A light round hit the market yesterday with selling continuing into this morning (so far). Since peaking yesterday the April contract has lost about $0.10/gallon of its value. Certainly only a small correction (basis the $0.40/gallon upward move for the April contract since January) so far but most importantly the April RBOB contract has now breached it upward trend channel support that has been in play since the middle of January. The next support level for the April contract is around $3.20/gallon. Unless the market gets some new fundamental support I would expect the downside correction to take the price down to the next support level.
In the area of currency wars Germany's Chancellor Merkel dismissed any thoughts of currency manipulation saying that the current value of the euro is within the currency's normal trading range. She said that euro exchange rates of between $1.30 to $1.40 are part of the normality of the history of the euro. All of that sounds good but with the Yen continuing to decline Japanese companies are continuing to see their export pricing advantage growing. Germany's equity market is underperforming most other developed world markets as it continues to be impacted by a rising euro.
Global equities recovered their losses from earlier in the week. The EMI Global Equity Index is now showing a slight gain for the week and a widening of the year to date gain to 0.5%. Brazil continues to fall deeper into negative territory for 2013 and is now showing a loss of 6% for the year to date. On the other hand Japan's bourse is now showing a double digit gain for the year as a weak Yen continues to support this export oriented economy. Germany is only showing a gain of 2%. So maybe there are no official currency wars but as it stands at the moment interrelationships among various currencies are providing an advantage for some and not for others. The balance is a bit out of sync at the moment.
I am maintaining my Nat Gas view and bias at neutral as the weather forecasts and nearby temperatures are supportive. 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 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.
Dominick A. Chirichella
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