Sunday, October 14, 2012

Natural Gas Sentiment Continuing to Change

The US natural gas market is sounding and acting like a market that has no intention of collapsing as it did last winter. More and more signs are pointing to a market that is currently looking higher and not lower. The injection season has been a huge surprise this year with the majority of the weekly injections under performing both last year and the five year average. The surplus of natural gas in inventory peaked versus the same period last year and the five year average in at the end of March when there was about 890 BCF more in inventory than the previous year and about 935 BCF more than the five year average. Since peaking the surplus has steadily declined throughout the inventory building season.

Basis the latest inventory report the surplus declined by 651 BCF or 73% since peaking in the last week of March and 665 BCF or 71% versus the five year average for the same period. This has been a significant turnaround and one that not many analysts were predicting back in the first quarter of 2012. The combination of an above average level of coal to natural gas switching due to very low nat gas prices at the end of the winter, a very early start to a very hot summer period resulting in an increase in nat gas for cooling related power generation demand and a slow but steady reduction in the number drilling rigs deployed to the nat gas sector. In fact rigs deployed to nat gas are now at a 13 year low.

Although natural gas inventories are going to end the season at a new record high the level will be less than 2% above last year. With a more normal winter forecast coupled with supply not soaring it is likely that the price of nat gas will settle into a much higher trading range than last winter and spring. I would expect the futures market to trade in a wide range of about $3 to $3.20/mmbtu on the low side to even as high as $4 to $4.25/mmbtu on the high side if the winter weather truly materializes as forecast.

I am expecting a wide trading range as the winter forecast is uneven with mild temperatures forecast for the first part of the winter heating season (October through December) and much colder and snowy conditions predicted for the second half of the season (January through March). Certainly the forecast can change significantly as time moves forward and any repeat of last winter will change everything as prices will plummet once again as another surplus would build in inventory.....Read the entire Dominick Chirichella CME Group article.

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