Monday, December 3, 2012

Natural Gas Prices on the Defensive to Start the Week

The front futures are trading up 2 cents at $3.58.
From the CME:
At the moment there is not much to support the price of Nat Gas. The six to ten day and eight to fourteen day temperature forecasts continue to project warmer than normal temperatures through the first half of December. The spot Nymex contract has once again breached the key technical support area of $3.60/mmbtu and may now be heading for a test of the next support area of around $3.36/mmbtu or the price level the market was trading at back in the middle of September.

The enthusiasm for the prospects of a colder winter than last year has waned over the last week or so as the short term weather forecasts are starting to remind many traders and investors of what evolved last year. I am not saying that the next phase of the winter heating season is going to be warmer than normal I am just indicating that the current forecasts are making market participants less confident of a cold period coming in January and February. Even the Jan/Mar winter Nat Gas intermonth spread has now switched back to a small contango after being in a modest backwardation for the last several months. That is yet another bearish indicator for the short term.

The short term direction of Nat Gas prices are going to be primarily driven by how the actual and forecasted temperatures turn out over the next several weeks. Right now the very short term temperatures as well as the aforementioned forecasts are all bearish for Nat Gas heating related demand and are likely to result in more injections before resuming the net withdrawal trend that was started three weeks ago. As discussed below we are likely to get a net withdrawal in this week's report after a cold spell hit many parts of the Nat Gas consuming region last week... however, the following week's report is likely to be biased to the bearish side with a higher probability of a net injection into inventory.

This week the EIA will release its inventory report on its normal schedule... on Decembers 6th at 10:30 AM. This week I am projecting a net withdrawal of 55 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced a modest amount of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 14 BCF and the normal five year net withdrawal for the same week of 51 BCF. Bottom line the inventory surplus will narrow modestly again 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 modestly 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 move into a deficit of about 15 BCF. The surplus versus the five year average for the same week will narrow to around 186 BCF. This will be a neutral to bullish 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 50 BCF to about a 90 BCF net withdrawal with the consensus still forming....MUCH MORE