So far Nat Gas futures are following the same pattern for the third week in a row. The pattern that has taken place is a rally ahead of the release of the EIA inventory data followed by selling after the data is released. So far with a few hours left to trading today the aforementioned pattern has held. Today's inventory report was marginally bullish from the perspective that is showed a larger withdrawal than the consensus but overwhelmingly bearish as it was well below the historical data (see below for a more detailed discussion on today's report).
During this week's pre-inventory rally the spot Nat Gas contract moved back into the trading range that has been in place since November of last year. Right now the market is still trading above the range low (support level) of $3.20/mmbtu with the price down a little less than 1% as of this writing.
From a technical perspective the market still remains in the $3.20/mmbtu to $3.50/mmbtu on the upside. With today's failure to remain in positive territory after yesterday's rally suggests to me from a technical perspective that a test of the lower end of the range may occur before there will be another attempt to move strongly to the upside (if at all this winter). We are now just one month away for the official start of Spring and the beginning of the lower demand shoulder season for Nat Gas.
Thursday's EIA report was slightly bullish from the perspective that the report showed a net withdrawal that was above the expectations but it came in well below last year and the five year average net withdrawal for the same period. Thus the number was bearish based on a comparison to the historical data. The 127 BCF withdrawal (below normal for this time of the year) was above the market consensus calling for a withdrawal of around 122 BCF. The draw of 127 BCF was less than my model forecast (-120 BCF withdrawal) this week. The year over year inventory situation remains in a deficit position versus last year but has narrowed while the surplus versus the more normal five year average has widened. The current inventory surplus widened to 361 BCF above the five year average or about 16% above.
This week's 127 BCF withdrawal compares to last year's draw of 155 BCF (a normal winter period) and the withdrawal for the five year average of 140 BCF for the same week.
Working gas in storage was 2,400 Bcf as of Friday, February 15, 2013, according to EIA estimates. This represents a net decline of 127 Bcf from the previous week. Stocks were 242 Bcf less than last year at this time and 361 Bcf above the 5-year average of 2,039 Bcf. In the East Region, stocks were 102 Bcf above the 5-year average following net withdrawals of 79 Bcf. Stocks in the Producing Region were 188 Bcf above the 5-year average of 737 Bcf after a net withdrawal of 35 Bcf. Stocks in the West Region were 71 Bcf above the 5-year average after a net drawdown of 13 Bcf. At 2,400 Bcf, total working gas is within the 5-year historical range.
The following chart shows the difference between current total Nat Gas inventories compared to last year and the five year average. The direction has been a narrowing of the surplus in inventory for the last few weeks. The current inventory level is once again below last year at this time but above the five year average. Compared to last year total inventories are now showing a deficit of 243 BCF or -9.2% below last year.
As shown in the following table total inventories are now at 56.6% of maximum workable storage capacity with the Consuming East region at 49.9% of maximum. This compares to storage sitting at 62.3% of capacity last winter at this time.
Profit taking selling hit most commodity markets with the oil complex lower across the board... even the RBOB gasoline contract declined strongly. Talk of a commodity fund in trouble and liquidating (unconfirmed) brought sellers early in the session in most commodity markets with the equity sellers picking up steam toward the end of the trading session. When the dust settled most all risk asset markets were in negative territory for the day.
As I have been suggesting the oil complex was already in the early stages of a short term downtrend after the WTI and Brent contract both breached key technical support levels. The selling momentum picked up quickly sending both WTI and Brent into a new lower trading range. Brent is now in a range of $115/bbl on the upside and $113/bbl on the lower end of the range. If the $113/bbl support is breached Brent could work its way back to the $109.50/bbl level or the price the market was trading at in mid-January.
WTI is now in a $95.50/bbl to $91/bbl trading range with most technical signals suggesting lower prices from current levels before seeing a major price recovery. The API inventory report (see below for more details) added a bit more selling pressure after showing a crude oil build of about 3 million barrels along with a build in both Cushing and PADD2.
RBOB gasoline futures are finally in a downside correction and possibly even the start of a short term downtrend as the highs of the last move may now be set. RBOB futures have increased by about $0.40/gallon since the rally began in January. Since peaking on Tuesday the April RBOB futures contract has now declined by $0.1395/gallon or a correction of a little over 30%. The April futures contract is now in a range of $3.30/gallon on the upside with support around the $3.15/gal level.
As I have been discussing in the newsletter the upward move in gasoline prices was not supported by the current fundamentals as inventories are still above both last year and the five year average. Rather the move was mostly speculative on the perception that there would be supply issues during the upcoming summer driving season. As I have mentioned on several occasions I have not bought into the potential for supply issues down the road. I still view gasoline prices as overvalued and susceptible to further moves to the downside. Retail prices will move lower slowly over the next week or so if the downside move continues.
Yesterday's selling gained momentum after the release of the minutes from the January 29th-30th Fed policy meeting were released this afternoon. The meeting was a bit of a surprise as the meeting showed that officials worried the central bank's easy-money policies could lead to instability in financial markets and might be hard to pull back in the future. The Fed plans to evaluate how the programs are doing at its next meeting March 19 and 20. Whether or not the Fed will actually start to back down on its massive money printing operations in the short term is the main issue that will be debated in the markets until the next meeting in March. If nothing else the upcoming meeting will likely turn out to be a major market mover in one direction or the other.
I am maintaining my Nat Gas view and bias at neutral as the weather forecasts and nearby temperatures are 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 bullish at the moment.
I am maintaining my view of WTI at neutral to cautiously bearish and maintaining my view for Brent at neutral to cautiously bearish. That said I am continuing to fly the caution flag as any additional equity market corrections will impact oil prices in much the same way... a round of profit taking selling. Furthermore the spot Brent contract has breached its technical resistance level of about $118/bbl suggesting lower prices in the short term.
Markets are mixed as shown in the following table.
Dominick A. Chirichella
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