The weather picture remains a bit unclear (but still biased to
the downside for prices) and as such we have seen Nat Gas futures
prices discount most of what was a very cold week along the high
demand heating fuel area of the northeast. There will be a
warm-up this coming week along major portions of the east coast
with temperatures hitting the 60's (
) in the New York area. The good news for the bulls is the
warming trend will only last a few days or so before the
temperatures return to more winter like levels. However, the
latest NOAA six to ten day and eight to fourteen day forecasts
are mixed and less supportive than the forecasts that were issued
late last week.
The short term or six to ten day forecast is still projecting
below normal temperatures over the eastern half of the US for the
period February 1st to 5th with the western half of the US
expecting mostly above normal temperatures. The supportive
weather changes quickly in the eight to fourteen day forecast
which is now showing a large portion of the US expecting above
normal temperatures for the Feb 3rd to the 9th with only a small
portion of the New England area expecting below normal
temperatures. Thus the first third of February will now likely
experience normal heating demand at best... possibly below
normal. With only 2/3 of the month then left and with March
projected to experience above normal temperatures across most of
the US it does not seem likely any significant rally is going to
emerge in the Nat Gas futures market anytime soon.
From a technical perspective the conclusions are very much in
sync with what the current weather/fundamentals are also
suggesting. At the moment it looks like the Feb Nymex Nat Gas
futures contract will expire on Tuesday in a contango for the
second year in a row... not very representative of a normal to
colder than normal winter. In addition both the expiring Feb
contract and the soon to be spot March contract are both trading
below the $3.50/mmbtu resistance level and in the $3.20 to
$3.50/mmbtu trading range that has been in play since December
10th with the exception of three sessions last week.
Obviously we can categorized last week's move above the
$3.50/mmbtu resistance level as a false break-out for the moment.
From a purely technical perspective the failure to stay above the
resistance level suggests further moves to the downside in the
short to medium term. It will have to take a solid move above the
$3.50/mmbtu level for sustained period of time to suggest a
further move to the upside.
Similarly from the fundamental side of the equation the weather
is going to have to quickly get back to colder than normal... at
least over the eastern half of the US after this week's round of
warm weather and stay colder than normal for the rest of February
to result in a solid move to the upside. The short term direction
of the Nat Gas futures market will remain mostly driven by the
short term weather and forecasts for the rest of the winter
heating season. Right now they both seem biased to the downside
This week the EIA will release its inventory on its normal
schedule and time... Thursday January 30th at 10:30 AM. This week
I am projecting an average withdrawal of 200 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 149 BCF and the normal five year net withdrawal for
the same week of 178 BCF. Bottom line the inventory surplus will
narrow modestly 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 above the net
withdrawal level for last year and versus 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 deficit will widen to about 208 BCF. The surplus versus
the five year average for the same week will come in around 298
BCF. This will be a bullish weekly fundamental snapshot if the
actual data is in line with my projection. The industry
projections are coming in a range of 180 BCF to about a 210 BCF
net withdrawal with the consensus still forming.
The oil complex is re-linking itself more closely to the slowly
improving global economy and by surrogate to the global equity
markets. As such the oil complex will now be as susceptible to a
round of profit taking selling as the global equity markets hits
multi year highs in several bourses around the world. The last
several weeks of global macroeconomic data along with corporate
earnings have been mostly positive for the future growth path of
the global economy and thus for growth in oil consumption.
However, the data releases have been light. That said things will
start to change this week as the pace of macroeconomic data
releases increase coupled with more market moving data and
information hitting the media airwaves.
Several important and market moving corporate earnings releases
will hit the media airwaves along with the always important and
market moving monthly US nonfarm payroll number and headline
unemployment rate. In between the aforementioned potential market
moving events will be the January US Federal Reserve FOMC meeting
and their policy statement release on Wednesday. In fact the US
economic calendar is very full with potential market moving data
being released just about every day this week. The week starts
off with durable goods and housing data on Monday and consumer
confidence on Tuesday. On Wednesday not only does the FOMC
meeting outcome get announced early afternoon but the monthly
employment data starts to hit the market with the release of the
ADP private sector jobs report followed by fourth quarter US GDP
data. Thursday more jobs data and the Chicago PMI Index. The week
concludes with the main event the monthly nonfarm payroll number
which is expected to increase marginally to 180,000 new jobs
versus last month's 155,000 jobs. the headline unemployment rate
is expected to drop by 0.1% to 7.7% versus last month's 7.8%
The US employment data could be very interesting as the US Fed
has placed more direct links to its policy and the rate of
recovery (or lack thereof) of the US employment situation. Also
with the equity market and many other risk asset markets
approaching overbought conditions this data point could be a
catalyst for a market correction. In fact we could see a market
correction whether the data is good or bad. If any combination of
the nonfarm payroll number underperforming versus the
expectations (and last month) and/or a big increase in the
headline unemployment rate would likely be interpreted as a sign
that the US economic recovery could be stalling and thus result
in a round of equity selling.
On the other hand if the data comes in better than expected the
market will likely interpret it as a sign that the US economic
recovery is growing at a faster than expected pace and thus a
signal to the US Central Bank that they may have to begin to
think about changing their very accommodating monetary policy
including the massive amount of quantitative easing that is now
in play including raising short term interest rates. We could get
a hint of all of this on Wednesday before the employment data is
released based on the announcement from the FOMC meeting.
In between all of the macroeconomic data will be the weekly oil
inventory snapshots on Tuesday and Wednesday. However unless
there is a major deviation from the expectations this week I do
not think the inventory data will have a major impact on the
short term direction of oil prices as the market seems to be
focusing more of its attention on the forward fundamentals and
have been somewhat discounting the bearish nearby fundamentals.
So yes this week there will be lots of data signals that market
participants will be analyzing to determine if the current equity
and risk asset short term bull markets need a rest or whether
they are worthy of continuing their march to the upside mostly
unabated. I suggest a lot of caution in trading this week as
volatility should be above normal with the possibility of sudden
price reversals at just about any time and on any day this week.
A good week to protect upside market profits aggressively.
I am maintaining my Nat Gas view at neutral with an eye toward
the downside if we get further bearish weather 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 at the moment.
I am maintaining my view at neutral and keeping my bias at
cautiously bullish even though the current fundamentals are still
biased to the bearish side. However, the technicals and forward
fundamentals are suggesting that the market could be setting up
for a move to the upside now that the spot WTI contract has
breached its upper resistance level.
Markets ended the week mixed as shown in the following table.
NOTE: Due to my schedule on Monday I am publishing Monday's
newsletter on Sunday morning.
Dominick A. Chirichella
Follow my intraday comments on Twitter @dacenergy
Read More on
International Business Times