In spite of ongoing cold temperatures along the high demand east coast Nat Gas futures prices remain below the $3.50/mmbtu resistance area. Yesterday after the inventory report was released Nat Gas prices sold off and breached what was the $3.50/mmbtu support area (now resistance) and returned to the trading range it has been in since back in December. The latest NOAA short term weather forecasts are still relatively supportive for Nat Gas heating related demand through the first week in February.
Both the six to ten day and eight to fourteen day forecasts are calling for below normal temperatures across the eastern half of the US. With the exception of a short round of above normal temperatures along the east coast expected for a few days next week the overall heating related demand should be mostly above normal through about February 7th and possibly beyond. That said the market remains skeptical that winter like weather in February with a projected change to above normal temperatures in March will be enough to make up for lost heating demand from earlier in the winter heating season.
At the moment any movements higher in futures prices seems to be consistently getting hit with selling. Any upside conviction seems to be very limited at this time with most traders taking a very short term view of the market and thus keeping their trades... especially from the long side with a very tight leash. From a technical perspective unless the spot futures contract breaches and closes above the $3.50/mmbtu resistance level we may be heading in a week or so of range bound trading within the $3.20/mmbtu to $3.50/mmbtu trading range that has been in place for most of December and January (with the exception of a few trading sessions). The key level that might get the bulls a bit more committed is a solid close above the $3.50/mmbtu level.
From the latest EIA Weekly Nat Gas report estimates from BENTEK Energy LLC (Bentek), average natural gas consumption for the nation rose this report week by 9.1 percent over last week's daily average. Below-normal temperatures across the United States contributed to the natural gas demand increase. The rise resulted principally from a 17% week-on-week increase in average residential/commercial consumption.
Consumption particularly rose in the Northeast. On January 22, natural gas consumption in the Northeast increased to 33.6 billion cubic feet per day (Bcf/d), 56 percent above the previous week's (January 14-January 20) seven-day average of 21.6 Bcf/d, according to data from Bentek. On January 23, Bentek reported that Northeast consumption rose to 36.2 Bcf/d, or 68 percent above the seven-day average. For both of these days, consumption in New York City rose to over 4.1 Bcf/d, or 41 percent above the 30-day average of 2.9 Bcf/d. Consumption in New England was just under 5.0 Bcf/d on January 22, and just under 5.1 Bcf/d on January 23, almost 22 percent above its 30-day average of 4.2 Bcf/d.
A combination of better than expected macroeconomic data including improved PMI data from China, Europe and the US seems to have moved the oil complex back to being more in sync with global equities... the leading indicator for the global economy. The oil complex has been de-linked with the macroeconomic data for the last few weeks or so and after relatively consistent better than expected economic data oil market participants may be turning back their focus to the data for price direction guidance. There are many signs of late that are suggesting that the global economy may have turned the corner and may be setting up for a more accelerated growth pattern. If so oil demand growth would certainly be impacted especially from the emerging market countries with China in the lead.
The Seaway saga continues with talk that flow rates were down to only 2,000 bpd at one point yesterday but later increased to about 277,000 bpd based on estimates provided by Genscape. The higher level is about the level the line was pumping at prior to the announced slowdown by the Seaway operator (the line has still not hit the maximum 400,000 bpd capacity). The Genscape increased rates have not been confirmed by Seaway rather the only official statement from Seaway yesterday was the line was running at a reduced rate due to problems downstream of Seaway (market rumors are suggesting an electrical problem) and due to high inventories at the Jonas Creek terminal. A scheduled Philips refinery turnaround was also mentioned as part of the reason for the slow down. I think the fact that high inventories and a refinery turnaround were mentioned as a cause for the problem suggest to me that the Seaway line may be saddled with inventory bottlenecks in and around the Jonas terminal for awhile. I believe if the problem was simply an electrical problem it most likely would have already been fixed. Inventory issues are the problem and with maintenance season getting underway this could be a lingering problem.
Needless to say the Brent/WTI spread has been very volatile over the last two trading sessions with the March spread widening by about $1.80/bbl on Wednesday... the day of the first announcement of the slowdown. Then the spread narrowed about $0.50 to $0.75/bbl early yesterday only to end the session narrowing by about $0.20/bbl. The spread has held steady overnight and is still trading at a level that suggests that the Seaway pipeline is still running at a restricted rate irrespective of the Genscape data from yesterday afternoon. There is still no official word from Seaway as to when the line will be back to normal operations. As I said yesterday this is a bump in the road of what I am still expecting to be a longer term trend of the Brent/WTI spread narrowing back to single digit levels during the second half of this year.
On the economic front another positive data point with the German business sentiment strengthening to the highest level since last June. A survey by the Ifo Institute reported that the headline business climate index rose to a seven month high of 104.2 in January from 102.4 in December. The market was looking for a 103 level. From an oil perspective sentiment rose most notably in the manufacturing and construction sectors... both energy intensive sectors.
I am maintaining my Nat Gas view at neutral with an eye toward the downside if we get further bearish weather 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 at the moment.
I am maintaining my view at neutral and keeping my bias at cautiously bullish even though the current fundamentals are still biased to the bearish side. However, the technicals and forward fundamentals are suggesting that the market could be setting up for a move to the upside now that the spot WTI contract has breached its upper resistance level.
Markets are mixed as shown in the following table.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
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