Nat Gas futures are higher for the fourth trading session in a row as the market continues to discount the above normal temperatures over the last week or so and instead has mostly focused on the forecast for colder than normal temperatures. By this weekend very cold weather is expected along major portions of the eastern half of the US or the coldest spell for this region of the US so far this winter. However, the arctic blast is projected (by NOAA) to begin to ease during the eight to fourteen day forecast period and could possibly be signaling that the expected cold spell may not be a sustained pattern.
The changing forecast is attributing to Nat Gas prices trading in a relatively tight trading range. With the exception of about three trading sessions the spot Nymex Nat Gas contract has been in a $3.20 to $3.50/mmbtu trading since the middle of December. With cold temps are on the way the market currently seems to be setting up for a test of the upper end of the trading range ($3.50/mmbtu). Unless the expected cold pattern is extended I do not think the market will have much success in breaching and remaining above the $3.50/mmbtu.
The Nat Gas market has been relatively quiet as the daily short term forecast is primarily the only price driver for prices. Those forecasts have been steady for the last week or so and as such the market has already priced in a return to cold weather.
This week the EIA will release its inventory on its normal schedule and time...Thursday January 17th at 10:30 AM. This week I am projecting an average withdrawal of 145 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced only a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 89 BCF and the normal five year net withdrawal for the same week of 144 BCF. Bottom line the inventory surplus will narrow week versus last year and hold steady compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be above the net withdrawal level for last year and at about the small level as 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 deficit will widen to about 143 BCF. The surplus versus the five year average for the same week will come in around 318 BCF. This will be a neutral weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a wide range of 100 BCF to about a 150 BCF net withdrawal with the consensus still forming.
The spot WTI and Brent futures contract prices are still hovering near the upper end of the trading channels. In addition refined product prices have been holding up surprisingly well (after the last several weeks of higher inventory builds) supported by several unscheduled refinery issues over the last week or so and a bout of cold weather in Europe. The macroeconomic data released over the last month or so has been supportive for the global economy and thus supportive for the oil complex as well as the broader risk asset markets.
The market will be slowly moving away from being driven by its normal price drivers and back into an event driven market. President Obama kicked off the event cycle once again in a press conference yesterday as he seemed to draw the line on the debt ceiling and spending cuts. After next week's inauguration I expect the Congress and President to once again enter into the next round of talks addressing raising the debt ceiling, spending cuts, deficit reduction and taxes. The 30 second news snippets will be flying from both sides and the short term impact on all financial markets will be swift with sudden price reversals and high volatility during the talks.
After a warmer than normal first half of the winter heating season it seems that some colder than normal temperatures may be on the way for the eastern half of the US. The latest NOAA sox to ten day and eight to fourteen day forecasts are both projecting below normal temperatures across the eastern half of the US or the high heating demand part of the country. Under normal circumstances the current forecast would likely have been met with a much stronger round of buying. However, with the nearby weather very unseasonably warm market participants are still a bit skeptical. European temperatures are colder than normal raising gasoil demand in Europe. However, it is not clear cut as to how long the colder temperatures will prevail in the US. For the next several weeks both Nat Gas and heating oil should see normal to above normal heating related demand.
I am upgrading my Nat Gas view to neutral with an eye toward the upside if we get further follow through buying and supportive weather forecasts. I now anticipate that the market is less likely to test the $3/mmbtu support level if the actual temperatures are in sync with the latest NOAA forecasts. 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 heart of the winter heating season and currently those forecasts are bearish.
I am maintaining my view at neutral and moving my bias also at neutral as the current fundamentals are still biased to the bearish side. However, the technicals are now suggesting that the market may be setting up for a breakout move to the upside as both WTI and Brent are hovering near the channel upside breakout level. There is still no shortage of oil anyplace in the world and a portion of the risk premium from the evolving geopolitics of the Middle East is continuing to slowly recede from the price of oil.
Markets are mostly lower except for Nat Gas as shown in the following table.
Dominick A. Chirichella
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