Dominick Chirichella: Natural Gas Prices Remain Firm

In spite of the downside miss in the weekly EIA Nat Gas inventory report the market has been in rally mode as prices have currently cleared the $4.16/mmbtu resistance area for the spot Nymex contract. Although the temperatures have been warmer the eastern half of the US has not yet seen consistent spring like temperatures which is keeping the bulls interested in pushing prices higher. In addition, the fact that total inventories are now 32.5 percent below last and 3.8 percent below the so called normal or five year average for the same week has put the market on alert that any unscheduled supply interruptions or sudden demand surges will send prices strongly higher.

The Nat Gas futures contract is entering a trading zone that has not been seen since the middle of 2011 or before the large imbalance of supply over demand started to take hold. If the spot contract can remain above the $4.16/mmbtu level it has a relatively clear area all the way to around the $4.40/mmbtu level. From a technical perspective the market is clearly in a bullish pattern as long as the spot contract remains above the new support level of around $4.16/mmbtu.

From a fundamental viewpoint the market is in the midst of a changing weather pattern as most of the country starts to experience spring like temperatures against a backdrop of the inventory cushion now solidly below normal as well as strongly below last year at this time. The fundamentals are going to have to provide support for the technical to remain in the new higher trading range.

The latest six to ten day and eight to fourteen day NOAA forecasts are providing a modest level of potential fundamental support as both forecasts are now projecting a large portion of the middle section of the US expecting below normal temperatures for the April 17th to April 25th timeframe. The forecast does not mean that there will be a significant amount of heating demand but it does mean there will be some in various parts of the country and it could result in injections coming in below both last year and the five year for the same timeframe thus widening the deficit further versus current levels.

Yesterday's EIA report was bullish versus the historical data but neutral to slightly bearish versus a comparison to the market consensus. The report showed a net withdrawal that was below the market expectations but greater than both last year and the five year average net injections for the same period. The 14 BCF withdrawal (strongly atypical for this time of the year) was below the market consensus calling for a withdrawal of around 21 BCF. The draw of 14 BCF was very near my model forecast (-15 BCF withdrawal) this week. The year over year inventory situation remains in a strong deficit position versus last year and has widened this week while the deficit versus the more normal five year average has also widened. The current inventory deficit came in at 66 BCF versus the normal five year average or about a negative 3.8 percent.

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Time to catch up on the Trend Jumper trades from this week
 

Is Natural Gas Hitting Upper Resistance levels

Natural Gas was able to add value again as prices moved back toward the upper resistance level of $3/mmbtu. Weather related demand is continuing to become less of a bullish factor from both the short term temperature forecasts to the tropics. The latest NOAA six to ten day temperature forecast is projecting the smallest area of above normal temperature so far this summer which is certainly not very supportive for Nat Gas prices. The eight to fourteen day forecast is a bit more bullish in that it is projecting a larger area of above normal temperatures. Overall both forecasts will not nearly result in as much Nat Gas related cooling demand as what was experienced during the first half of the summer. The net result net injections will continue to creep higher over the next several weeks.

In addition the tropics are not threatening to Nat Gas production in the Gulf of Mexico as Ernesto is heading into Mexico and the two other tropical weather patterns out in the Atlantic are still low grade tropical weather event and it is much too early to project whether or not they will strengthen into something more impacting. Overall I do see any short term fundamental support for the current level of prices. I would expect that the market will run into difficulty in breaking through the technical resistance level of around $3/mmbtu.

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Today the EIA released their latest STEO report. Following are the main highlights relate to Nat Gas from the report.

EIA expects that natural gas consumption will average 69.8 billion cubic feet per day (Bcf/d) in 2012, an increase of 3.2 Bcf/d (4.8 percent) from 2011. Large gains in electric power use in 2012 will more than offset declines in residential and commercial use. Projected consumption of natural gas in the electric power sector averages 25.4 Bcf/d in 2012, 22 percent higher than in 2011, primarily driven by the improved relative cost advantages of natural gas over coal for power generation in some regions.

Consumption in the electric power sector during 2012 peaks at 31.6 Bcf/d in the third quarter, when electricity demand for air conditioning is highest. As a result of the extreme heat last month, estimated electric power sector natural gas consumption during July 2012 averaged 34.8 Bcf/d, 1.8 Bcf/d higher than projected in last month's Outlook......Read Dominik Chirihella' entire article.

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Crude Oil Prices Will Be Driven by the Externals This Week

From CME Group contributor Dominick Chirihella......

Last week was all about jawboning out of Europe. First from ECB President Draghi followed up by comments from Germany's Merkel reinforcing Draghi's main comment that the ECB will do everything to support the euro. Support for this type of comment from Merkel is very important as Germany is where the money is. For now the jawboning was enough to send many risk asset markets into a modest end of the week short covering rally. However, we can't lose sight that these type of comments have been coming out of Europe for the last three years and so far the sovereign debt issues are still not solved.

The big question is will the bold comments finally be converted to actions. Especially this coming week as the ECB holds its monthly meeting on Thursday August 2. Will the ECB initiate a bold solution that puts the EU problems on the back burner once and for all which has not been the case for the last several years. Will they simply lower short term interest rates and issue the usual support of the euro comments or will their actions include stimulus and some form of bond backing or buying of bonds from the troubles EU member states?

Whatever the ECB decides to do this week the market is now expecting actions that will support the debt problems and drive down the bond yields of the problem countries as well as send the euro into a much longer lasting rally that goes well beyond a simple modest short covering rally like we saw the last two trading days of last week. With the market now trading over the last few session with a strong ray of hope that the ECB and the EU will finally get a handle on the problems any disappointment next week will result in a huge push to the downside in the euro as well as in global equity markets.

Who said August is a quiet and sleepy time for global risk asset markets? Yes many participants are at the peak of the summer vacation season coupled with the London Summer Olympics at its peak but that is not going to prevent the markets from potentially active and volatile trading over the upcoming week and possibly for the rest of the summer. In addition to what is setting up to be a major ECB meeting on Thursday the US Federal Reserve FOMC will meet on Tuesday and Wednesday with many expecting the Fed to embark on a new round of quantitative easing of some form. The US economy has slowed to just a 1.5% growth rate a decline of 0.5% from the first quarter. The employment situation is not getting any better and the plethora of economic data that has hit the media airwaves over the last month or so has been supportive of further slowing of the US economy.

Is there enough negative data to support the Fed taking action now (as a recent WSJ article suggested) or will the Fed take a wait and see of what comes out for the ECB on Thursday while it awaits more data points like Friday's latest nonfarm payroll data? A new round of easing out of the US Fed is not a slam dunk at this meeting in my opinion. I think there are many reasons why it will be prudent for the Fed to wait another month or two before initiating a new round of easing that many believe will have limited success in bolstering the US economy and spurting the private sector hiring process. I do not think the Fed will act at this meeting and save their next so called silver bullet until the end of August at the Jackson Hole symposium (possibly mentioned in Bernanke's speech) or until the mid September FOMC meeting.

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