By
Dominick Chirichella - Mon 10 Dec 2012 06:58:00 CT
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Energy The Nat Gas market can be simply explained as bearish due to a bout of warmer than normal weather. As I have been discussing for weeks Nat Gas pricing in the short to medium term is primarily driven by the actual weather coupled with the short term temperature forecasts... which at the moment are both bearish as winter weather does not seem to be on the short term horizon for the majority of the eastern half of the US. Even the gap between nuclear power outages currently compared to last year and the five year average has narrowed to only about 1,000 MW thus reducing the amount of Nat Gas needed for replacement power generation significantly compared to a few weeks ago.
The latest NOAA six to ten day and eight to fourteen day temperature forecasts are decidedly more bearish than those issued during the second half of last week. The six to ten day forecast is now showing the eastern two thirds of the country now expecting above normal temperatures while the eight to fourteen day forecast is comparable except for a return to more normal temperatures in parts of the southeast and Florida. Heating related demand for Nat Gas into the fourth week of December is now likely to remain below normal thus potentially resulting in a lower than normal withdrawals or even a small injection.
Another sign of the growing bearish sentiment is the Nymex Jan/Mar intermonth spread that was trading in a modest backwardation just a few weeks has now moved even deeper into a contango of just over $0.03/mmbtu. Unfortunately for the bulls this is the pattern of what happened last year when the temperatures began to warm and remain warm for an extended period of time. I am not saying that the rest of the winter heating season is going to duplicate last year but I will say that many market players are looking back and trading this market with a lot more caution than just a month or so ago.
This week the EIA will release its inventory report on its normal schedule... on Decembers 13th at 10:30 AM. This week I am projecting a small withdrawal of 5 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a minimal amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 79 BCF and the normal five year net withdrawal for the same week of 113 BCF. Bottom line the inventory surplus will widen significantly this week versus last year and compared to the five year average if the actual numbers are in sync with my projections. This week's net withdrawal will be significantly below the net withdrawal level for last year and below 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 surplus will widen to about 41 BCF. The surplus versus the five year average for the same week will also widen to around 276 BCF. This will be a bearish weekly fundamental snapshot if the actual data is in line with my projection. The early industry projections are coming in a wide range of a 1 BCF build to about a 30 BCF net withdrawal with the consensus still forming.
After experiencing the first weekly loss in five weeks the oil complex is starting the week in positive territory. A combination of uplifting data out of China and Germany along with the OPEC meeting this week in Vienna have all contributed to a mild round of short covering to start the week. Over the weekend China reported industrial output rose to 10.1%... year over year versus an expectation for 9.8% and 9.6% compared to Octobers' number. However, China's oil imports did decline in November by 1.3% compared to October in spite of a 4.2% increase in refinery runs. China is starting to show the early signs of stabilizing but still has a way to go before the economy enters into a sustainable growth spurt.
In Europe a mixed picture as the financial markets are negative on news that Italy's Monti is resigning but offset a tad by the better than expected increase in German exports in October. Exports grew by 0.3% versus September's 1.4% contraction. However, German manufacturing turnover fell for the second month in a row but at a slower pace than in September. As has been the case for several years the European economy continues to struggle with some positive flashes but still mostly negatives as the EU is projected to remain in a recession for the majority of 2013.
In the US the latest nonfarm payroll data released on Friday came in better than expected and was only minimally distorted by the Hurricane that hit the east coast in November. The macroeconomic data out of the US has been surprisingly positive over the last several weeks starting with an upgrading of third quarter GDP to 2.7% followed by positive employment data on Friday. That all said the looming fiscal cliff will have to be solved before any investor enthusiasm returns to the US market. I am still expecting a resolution to the fiscal cliff. The President and the leading House Republican met over the weekend. I am expecting a deal of some sorts prior to the Christmas holiday. I believe the Republicans will concede on a tax hike for the wealthy with some form of spending cuts to follow.
I am maintaining my Nat Gas price direction at cautiously bearish as the fundamentals and technicals are still suggesting that the market may be heading lower for the short term. I anticipate that the market is now positioned to test the lower end of the trading range... even after this week's bullish inventory snapshot. 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 early stages of the winter heating season and currently those forecasts are all still mostly bearish.
I am changing my view and bias to cautiously bearish as the fundamentals are now biased to the bearish side as well as the technicals. At the moment 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. In the short term the price of oil is still very susceptible to sudden price moves based the 30 second news snippets. However, the fundamentals, the markets view of the global economy, the US fiscal cliff negotiations and less so the geopolitics will be the price drivers in the short term pretty much in that order. This is still an event driven market for oil at the moment.
Markets are mixed as shown in the following table.
Best regards,
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