The weather pattern could finally be changing. The latest NOAA six to ten day and eight to fourteen day forecasts as both decidedly more supportive for higher levels of Nat Gas heating related consumption than those from just a week ago. Neither forecast period is projecting above normal temperatures with the six to ten day forecast expecting below normal temperatures across most of the US. However, the eight to fourteen day forecast is a tad less supportive.
The last few weeks of January could prove to be a transition to the long awaited more normal winter like weather and thus a more normal withdrawal pattern from inventory. One thing for certain is the temperature forecast is going to be colder than last year which was a very warm winter. For example the time period covering the EIA inventory report that was issued yesterday experienced temperatures that were 9.1% colder than last year and thus the larger than expected draw from inventory this week.
Technically the spot Nymex Nat Gas futures contract may also be turning the corner showing the early signs of forming a bottoming pattern. We seem to be moving into a higher trading range of $3.2 to $3.5/mmbtu. At the moment the market has gained upside momentum in overnight trading after a relatively muted reaction to the inventory report in yesterday's trading session. The market sentiment may be changing to a more upside bias but will certainly need the support of continued projected winter like weather for the upside momentum to hold.
In the latest weekly EIA Nat Gas report relatively low demand during the month of December and the beginning of January contributed to the low prices. December 2012 was the 10th warmest on record, according to recent NOAA reports, with seasonally warm temperatures particularly east of the Rocky Mountains. Temperatures in December averaged 36.4 degrees nationwide, 3.4 degrees greater than the long-term average. Mild weather has persisted into January as well. The warm December was evident in the weekly natural gas storage withdrawal; the five-year average (2007-2011) withdrawals for December 2012 are all over 100 Bcf. A triple digit withdrawal did not occur until the week ending December 28, 2012; additionally, the WNGSR reported a net injection of 2 Bcf for the week ending December 7, 2012. While this is not unprecedented, there are only two other net injections in December on record (1998 and 2005).
Both natural gas supply and consumption fell during the report week. According to data from Bentek Energy LLC, total supply fell by 0.2 percent, with a 0.4 percent decline in dry production. LNG sendout and pipeline imports from Canada increased during the week. Supply is down 1.5 percent from the same time last year. Consumption fell 8.0 percent this week, with a 12.8 percent decline in residential and commercial natural gas consumption. Residential and commercial consumption, however, was 14.4 percent greater than this time last year, although last winter was one of the warmest on record. Use of natural gas for power generation and industrial consumption also fell this week.
The reality of growing supplies in the US is finally catching up as oil prices are on the defensive today. Earlier in the week in the EIA Short Term Energy Outlook the EIA projected a significant increase in US domestic crude oil production for 2013 followed by Wednesday's bearish oil inventory report... especially for refined products. The bearish data was mostly discounted until yesterday when refined products started to decline followed by the entire complex trading at lower levels today. That said the decline has been limited in magnitude.
Oil traders and investors have been mostly discounting current or nearby fundamentals and placing more emphasis on projected fundamentals on the premise that the global economy may in fact be at a turning point and readying for a more robust growth period. Whether or not that will turn out to be the case the fact that supply from non-OPEC countries... led by the US will more than offset any demand growth in 2013 in my view. I would emphasize that the perception view should come with a high degree of caution as supply is likely to still outstrip demand and global economic growth may not turn out to be as robust as some of the perception traders are expecting.
We are once again just weeks from the markets moving back more toward an event driven market as negotiations over the US fiscal cliff, debt and deficit get underway in Washington DC. Based on all previous discussions and the state of the political divisiveness in the US this round is not expected to be smooth at all. I would not be the least bit surprised if there were no deal at all with the sequester cuts coming into play. The President continues to indicate that the US does not have a spending problem ( I am not sure where the record deficits came from then) while the Republicans have been saying the tax situation is now over and the only remaining problem is the US spending problem.
Not a good point to start negotiations on issues that have a little over a month to be resolved. Bottom line I am expecting a period of above normal volatility once again with oil and most risk asset markets moving based on the 30 second news snippets that hit the major media airwaves from both sides. In addition to the higher level of volatility the aforementioned scenario will once again be elevating the cloud of uncertainty over the US economy (the global economy to some extent) and thus likely to have a negative impact on short term economic growth.
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
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.Copyright CME Group All rights reserved.
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