Nat Gas prices respond to the current temperatures and short term weather forecasts. Both are now a tad more supportive than they were late last week and into the weekend. As such the spot Nat Gas futures price is now trading within shouting distance of the upper end of the trading range that has been in play since November of 2012.
The latest six to ten day forecast is still projecting above normal temperatures across a major portion of the US east coast but the mid-section of the country is now expecting more normal temperatures during the period February 11th - 15th with the western 1/3 of the country expecting below normal temperatures. The eight to fourteen day forecast is now projecting below normal temperatures over about 2/3 of the country including the mid-west with only the upper east coast section of the US expecting above normal temperatures. Based on the latest forecast heating related Nat Gas demand may be near normal for the period February 11th thru the 19th. Thus inventory withdrawals should result in the deficit versus last year widening while the surplus versus the five year average for the same period is likely to hold steady or even possibly narrow a tad.
On a topic we have not mentioned in awhile... coal to Nat Gas switching Reuters reported yesterday that additional coal to gas switching may be already happening. Arch Coal the second largest US coal producer reported a larger than expected quarterly loss on Tuesday as their cost cuts failed to offset the impact of low coal prices and a 15% slide in sales volume.
From a technical perspective the spot Nat Gas futures price is now within about $0.05/mmbtu of the upper resistance level of the trading range. If this level is breached and settles above the $3.50/mmbtu level there is intermediate resistance around the $3.65/mmbtu and much stronger resistance around the $3.90 to $4/mmbtu range. The market sentiment and the momentum have also changed toward a more price supportive view. At the moment the likelihood of the spot Nat Gas prices heading back for a test of the psychological $3/mmbtu is very low.
I am still not convinced that the market is poised for a major move to the upside from current levels. However, The momentum and weather forecasts of late suggests that we may still have higher to go before any retrenchment with the likelihood of a test of the range high of $3.50/mmbtu now very possible.
This week the EIA will release its inventory on its normal schedule and time... Thursday February 7th at 10:30 AM. This week I am projecting an average withdrawal of 135 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 94 BCF ( a very warm period) and the normal five year net withdrawal for the same week of 165 BCF. Bottom line the inventory surplus will narrow modestly this week versus last year but widen when 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 but below versus 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 243 BCF. The surplus versus the five year average for the same week will come in around 334 BCF. This will be a neutral to bearish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a range of 125 BCF to about a 165 BCF net withdrawal with the consensus still forming.
As I have been discussing in the newsletter geopolitics are acting as a price floor for the oil complex even as the West and Iran and are scheduled to meet on February 25th in Kazakhstan. Today the US will tighten sanction on Iran by blocking buyers of Iranian crude oil from paying in US dollars. Under penalty of expulsion from the US Banking system buyers of Iranian oil will now be restricted to using their own currencies and keeping their payments in escrow. Iran will thus only be able to use the funds for locally sourced goods and services... sort of a barter transaction.
On the macroeconomic front most of the data from the main regions of the world have been relatively positive coming in better than expected and thus suggesting that the global economic recovery may have turned the corner and may be now growing at a faster pace. There is no question that the US economy (for example) is in a growth pattern. The main problem is the pattern is still much too slow to result in a significant change to areas of the economy like employment and consumer spending (which represents about 70% of the US GDP). Much like in the US many of the developed world countries are flooding their economies with liquidity in the form of very low short term interest rates and large amounts of quantitative easing. Although the global economy is in a growth pattern the very accommodative monetary policies in play around the world are still very much the reason why the economy is growing at all. Another example the Japanese Yen hit a three year low in overnight trading in anticipation that the Bank of Japan may ease even further and in larger increments (QE).
As long as many major central banks continue to operate in a very accommodative manner the downside for most risk asset markets like equities, oil and most other traditional commodities will be limited. That does not mean values will only go higher. I still see most risk asset markets as being overbought and very susceptible to further rounds of profit taking selling as we experienced on Monday. What I do not see is a major collapse in values and the start of a sustained downtrend in the short to even medium term. With money continuing to move into the global equity and commodity markets I would expect that most of the future rounds of profit taking selling will likely be met with bottom picking buying thus limiting the downside moves to increments of 1 to 2% at any time (equities).
With the oil complex moving very much in sync with the equity sector any further downside corrections in equities will quickly spread to the oil complex. The market sentiment is similar to what it was at the end of the first quarter of 2009 when market participants started to discount the nearby conditions and focus on what the economy would be like down the road if it remains in a growth pattern. As in 2009 the so called perception trade drove values and it is once again driving most risk asset values at the moment. From time to time the current fundamentals have an impact but the main driver is the perception that the global economy will be more robust down the road.
I am moving my Nat Gas view and bias to neutral as the weather forecasts and nearby temperatures remain somewhat 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 supportive 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
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