The Nat Gas futures market has been firm throughout the entire session today on news of Southern Companies largest utility unit… Georgia Power experiencing an explosion and subsequent shut down of its 3,166 megawatt coal fired power unit. The explosion occurred late Thursday afternoon and will likely result in an increase in Nat Gas power related consumption until this unit is fixed and back on stream.
With inventories now slightly below normal (compared to the five year average for the current week) the market is now exposed to unscheduled interruptions in any part of the power grid that will ultimately result in an increased usage level of Nat Gas for generating power. The Georgia Power issue would probably not have even resulted in a blink had it occurred last year at this time when end of winter inventory levels were at a record high. However, with the overhang gone and the summer cooling season yet to come the market will react to any of these type of situations with a quick rally in prices… if for nothing other than short covering.
The spot Nat Gas futures price is now solidly above the technical and psychological $4/mmbtu level for the second time in two weeks. In fact the market has hit the highest price of the year and a level not seen in Nat Gas futures since September of 2011. From a technical perspective the market is breaking out to the upside once again and with a few settlements above the $4 to $4.02 level will certainly result in a test of the next upside resistance level from September of 2011 of around $4.16/mmbtu. Basis the activity today and the evolving fundamentalssituation I am upgrading my view and bias back to cautiously bullish but with a caution that all should use tight, trailing stops as the situation can change very quickly.
An interesting analysis from the latest EIA Weekly Nat Gas report. Marketed natural gas production in the Gulf of Mexico federal offshore region falls to 6% of national total in 2012 Continuing a long-term trend of decline, the contribution of marketed production of natural gas from the Gulf of Mexico federal offshore region accounted for 6.0 percent of total U.S. marketed natural gas production (4.2 billion cubic feet per day (Bcf/d) in 2012, according to data published in the Energy Information Administration's (EIA) Natural Gas Monthly. In contrast, in the period from 1997 to 2007, marketed production from these same waters provided, on average, over 20 percent (11.7 Bcf/d), of U.S. marketed production.
Among the contributing factors to this decline:
• Increasing amounts of domestic, on-shore production, primarily from shale gas and tight oil formations. In 2012, nearly 40 percent (over 26 Bcf/d according to Lippman Consulting, Inc.) of U.S. dry natural gas production came from production in shale plays, increasing over 20-fold from 2000 levels. In 2012, the two most productive shale plays were the Haynesville play in Louisiana and Texas, and the Marcellus play in Pennsylvania. In the Marcellus play, despite reduced drilling activity, production increased by almost 70 percent in 2012 over year-ago levels. Increased drilling in tight oil plays like the Eagle Ford play in Texas has contributed to increased associated natural gas production.
• Relatively low natural gas prices. Low natural gas prices in recent years have diminished the economic incentive for off-shore natural gas-directed drilling. However, relatively high crude oil prices continue to support oil-directed drilling and the production of associated gas, particularly in deep waters. New large deep water projects directed toward liquids development are projected to reverse the decline in natural gas production from the Gulf of Mexico in 2015, according EIA's Annual Energy Outlook 2013 Early Release.
The risk off trading pattern has been the dominant pattern for most of the week. Everything in the oil complex is lower for the week with WTI leading the way down resulting in a modest short covering based widening of the May Brent/WTI spread. The Brent/WTI spread is mostly driven by the potential for inventories to temporarily increase in Cushing as a result of the Pegasus pipeline shutdown. The macroeconomic data has been mostly negative this week with the main event… US nonfarm payroll data… set to hit the media airwaves at 8:30 AM EST today.
With the downside miss on the nonfarm payroll number the market is becoming more concerned that the US economic recovery may not be on solid ground. The market had been originally forecasting 185,000 to 190,000 new jobs for the month of March compared to 236,000 in February. The headline unemployment rate was forecast to remain at 7.7%. The number came in at just 88,000 new jobs created with the headline unemployment rate falling to 7.6 percent. The unemploy,ent rate is not very meaningful as the reduction was not a result of new jobs rather it was due to another significant reduction in the partiicpation rate. People continue to leave the job market and give up looking for a new job.
On the geopolitical front another round of talks between Iran and the west began in Kazakhstan today and will continue into tomorrow. The last round of talks were deemed to be successful enough to schedule the current two day session. The west is looking for a response from Iran based on what the west put on the table at the last meeting. I am not sure how much progress will be made based on the historical results of the negotiations that have been going on for many years. In addition, with all of the rhetoric associated with North Korea Iran may feel less compelled at the moment to give in a whole lot as the US has its hands full in dealing with North Korea and minimal attention is likely being focused on Iran in the short term. That all said it would certainly be a very strong positive if any negotiated agreement is reached. If more progress is made I would view that as bearish for oil prices as any deal would likely involve an easing of the sanctions.
I am maintaining my view at neutral for Nat Gas as the forecasted weather pattern still appears to be a negative for heating related Nat Gas demand. I do not expect prices to collapse but I view the moderating temperatures to result in the Nat Gas price rally likely topping out at this time as the lower demand shoulder season finally arrives. I am still expecting the front end of the futures market to settle into a $3.75 to $4/mmbtu trading range once this week's inventory report is out and digested.
I am maintaining my view of the entire complex at neutral across the board but with a cautiously bearish bias as inventories are starting to build and jeopardizing the technical bottoms that have been put in place in the complex over the last several weeks. WTI has now breached its range support level as has Brent and refined products. The complex is now showing signs that the next move could be a continuation to the downside.
Markets are mixed as shown in the following table.
Dominick A. Chirichella
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