At the moment there is not much to support the price of Nat Gas. The six to ten day and eight to fourteen day temperature forecasts continue to project warmer than normal temperatures through the first half of December. The spot Nymex contract has once again breached the key technical support area of $3.60/mmbtu and may now be heading for a test of the next support area of around $3.36/mmbtu or the price level the market was trading at back in the middle of September.
The enthusiasm for the prospects of a colder winter than last year has waned over the last week or so as the short term weather forecasts are starting to remind many traders and investors of what evolved last year. I am not saying that the next phase of the winter heating season is going to be warmer than normal I am just indicating that the current forecasts are making market participants less confident of a cold period coming in January and February. Even the Jan/Mar winter Nat Gas intermonth spread has now switched back to a small contango after being in a modest backwardation for the last several months. That is yet another bearish indicator for the short term.
The short term direction of Nat Gas prices are going to be primarily driven by how the actual and forecasted temperatures turn out over the next several weeks. Right now the very short term temperatures as well as the aforementioned forecasts are all bearish for Nat Gas heating related demand and are likely to result in more injections before resuming the net withdrawal trend that was started three weeks ago. As discussed below we are likely to get a net withdrawal in this week's report after a cold spell hit many parts of the Nat Gas consuming region last week... however, the following week's report is likely to be biased to the bearish side with a higher probability of a net injection into inventory.
This week the EIA will release its inventory report on its normal schedule... on Decembers 6th at 10:30 AM. This week I am projecting a net withdrawal of 55 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 14 BCF and the normal five year net withdrawal for the same week of 51 BCF. Bottom line the inventory surplus will narrow modestly again 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 be modestly below the net withdrawal level for last year and below the five year average net withdrawal for the same week if the actual outcome is in sync with my forecast.
If the actual EIA data is in line with my projections the year over year surplus move into a deficit of about 15 BCF. The surplus versus the five year average for the same week will narrow to around 186 BCF. This will be a neutral to bullish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a wide range of a 50 BCF to about a 90 BCF net withdrawal with the consensus still forming.
As I discussed last week the market may be in the very early stages of starting to change its sentiment as some of the macroeconomic data of late is starting to suggest that parts of the global economy may be starting to stabilize. The latest data from over the weekend was the PMI manufacturing Index out of China. China's manufacturing Index expanded for the second month in a row coming in at 50.6 for November versus the estimates of 50.8 but above October's 50.2. This is the second month in a row that the Index suggests that the energy sensitive manufacturing sector is expanding once again.
If the data truly reflects the situation in China it suggests that the main economic and oil demand growth engine of the world may be expanding even as its main export market... Europe is still in recession. This is positive sign for the global economy and one that may be starting to put a floor on the selling of risk asset markets seen over the last several months. With Friday's surprise increase in US GDP to 2.7% for the third quarter from the first reading of 2% the sluggish performance of the global economy throughout most of 2012 may finally becoming to a turning point. The main issue facing the US economy in the short term is solving the fiscal cliff.
The negotiations continue seemingly mostly in the media airwaves as both sides currently are holding their views with neither side giving in at this point in time. I still expect a deal to be done but as I have mentioned it will likely linger until the end as each side attempts to extract as much from the negotiations as possible. Interestingly the markets are becoming a bit anesthetized as global equities held onto minor gains last week in spite of what seems to be a stand - off based on the 30 second news snippets hitting the media airwaves.
As we enter the last month of trading for the year the economy and the implications to global oil demand have moved into the top position as the main oil price driver while the evolving geopolitical situation in the Middle East remains a close second. The geopolitical situation in the Middle East... in particular surrounding Iran's nuclear program is now serving more as a floor in oil prices rather than an upward price driver. The most immediate or short term concern from the region is the potential spreading of the Syrian civil war beyond its borders and into the oil rich section of the region.
As far as Iran is concerned the US Congress passed a few more stringent sanctions late last week that could help in bringing Iran to the negotiating table with a more open mind than they presented at the last round of meetings. Right now no new meeting are scheduled and likely will not be until next year at the earliest. I do not think there will be any military strikes against Iran in the near term as Israel has exhausted its short term military options during the conflict with Hamas last month. In addition with the US and European economies still struggling I do not see the west getting involved in any military conflict with Iran anytime soon.
I am downgrading my Nat Gas price direction to cautiously bearish as the fundamentals and technicals are once again suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... especially after this week's bearish inventory snapshot. 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 in the early stages of the winter heating season and currently those forecast are all mostly bearish.
I am keeping my view at neutral and adjusting my bias to the cautiously bullish side as the oil markets may get a boost from what seems to be a slightly changing sentiment coming from the financial markets. At the moment there is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geoponics of the Middle East remains in the price in anticipation of a spreading of the civil war in Syria as well as the ongoing concerns over Iran's nuclear program. In the short term the price of oil will move based more on the markets view of the global economy, the US fiscal cliff negotiations and less so on the geopolitics. This is still an event driven market for oil at the moment.
Markets are mixed heading into the US trading session as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
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