Note: Monday's Report is Being Published on Sunday Due to My
Schedule in Asia for Monday
Quote of the Day
The more I want to get something done, the less I call it work.
Richard Bach
Nat Gas moved higher throughout most of the week in a modest
round of short covering and some new buying on a combination of
bullish short term weather forecasts and a technical breakout
about the upper range resistance point of $4.30/mmbtu. The spot
April Nymex Nat Gas contract has now breached the $4.30/mmbtu
resistance level with the new resistance level now around the
$4.60/mmbtu. After Thursday's neutral EIA inventory report some
of the shorts who got back into the market were squeezed out on
Friday as the spot April Nymex Nat Gas contract approaches this
week's expiration. The combination of inventories at least moving
in the right direction and yet another colder than normal weather
forecast were enough to send the weak shorts to the sidelines.
However, the vast majority of the current support for prices is
the latest six to ten day and eight to fourteen day weather
outlooks. The forecasts are still calling for below normal
temperatures covering the eastern two thirds of the USA through
at least the first third of April. The colder than normal
temperatures in April are certainly not as consequential as a
similar forecast in January. However, the current weather pattern
is likely to result in modest net withdrawals from inventory for
several more weeks (or more) prolonging the start the normal
inventory injection season and the lower demand shoulder season.
On the week Nat Gas increased by 5.64% or $0.235/mmbtu adding to
the previous week's modest gains.
This week the EIA will release the weekly Nat Gas inventory
injection on its regularly scheduled day and time...Thursday,
March 31rd. This week I am projecting a net withdrawal of 24 BCF
versus a modest injection last year's but around the same net
withdrawal for the five year average for the same week. My
withdrawal forecast is based on the fact that heating related
demand likely increased a bit last week as colder than normal
temperatures engulfed a good portion of the US. My projected
withdrawal will be more than last year's net injection level of
12 BCF but around the same level as the more normal five year
average net withdrawal for the same week of 22 BCF.
If the actual EIA data is in line with my projections the year
over year deficit will widen to 42 BCF. However, the surplus
versus the five year average for the same week will stay about
the same at 38 BCF. This will be a neutral to marginally
supportive weekly fundamental snapshot that should keep prices
firm for the short term.
The oil complex continues to be dominated by events and only
to a lesser extent by what is going on in the macro economy or
current supply and demand situation. With Japan already priced
into the market the overall situation played little into the how
oil prices traded last week. The main event for last week was the
evolving situation in Libya and the greater Middle East. There
were many headlines emanating from this area most of which fueled
the fear level of investor/traders and thus resulting in a week
of strong moves in oil prices to the upside. Secondarily the
supply and demand reports for oil this week were supportive with
total commercial stocks in the US falling for the sixth week in a
row. The macroeconomic data was mostly supportive but the
collapse of the Portuguese government damped some of the
enthusiasm in the equity markets as participants were quickly
reminded that the EU still has a long way to go to solve their
debt issues.
Although oil prices are somewhat overvalued... basis the
current fundamentals including the shut-in of Libya crude oil
production...and due for a downside correction and significant
move to the downside will more than likely turn out to be a
buying opportunity and/or a point to add to buy side hedge
portfolios depending on what side of the equation you are on. The
world has already adjusted to the loss of Libyan crude oil and as
I have been saying for weeks it has not resulted in creating any
shortages of oil anyplace in the world. The combination of
additional supplies from Saudi Arabia coupled with end users
(refiners) working out the logistics of exchanging and trading
sweet for sour grades along with a reduction in demand for crude
oil from Japan have all contributed to the global flow of oil
easily meeting the needs of the consumers. With Libya well priced
into the oil market much of the latest round of increases in oil
prices is starting to build into the risk premium an interruption
in supply from one or more of the Middle East oil producers but
certainly not Saudi Arabia. If the situation in Saudi Arabia
deteriorates to a Libya or an Egypt the price of oil will spike
significantly higher than where it is today.
The markets are quickly accepting the fact that the democracy
protests which began in Tunisia late last year and has spread to
many nations in North Africa and the Middle East (Syria is the
latest to experience massive protests over the weekend) will be
around for an extended period of time. Barring a major shut-in in
production from other oil producers prices should recede a bit
form current levels as some of the risk premium comes out of the
prices. However, I do not expect a massive sell-off in prices
anytime soon. Over the weekend there was an indication that now
that the opposition group has retaken several oil towns Qatar
reportedly has agreed to market Libyan oil with some exports
possibly available in as short as a week or so. If this is
accurate it could put some downward pressure on prices in the
short term.
On the other side of the equation if the aforementioned
becomes the short to medium term scenario I would expect oil
prices to remain firm and slowly move higher as global supply,
demand and commercial inventory levels are moving toward more
pre-recession levels insofar as the oversupply situation that has
been capping oil prices for a few years. With the global economic
recovery well under way demand for oil will grow steadily ...as
long as prices do not spike quickly above the $125 to $130/bbl
mark. If consumption continues to grow the world will be moving
back into a demand driven model and thus a positive for oil
prices in the medium to longer term. So in either case...a supply
interruption or the economic recovery resulting in oil
consumption growth...prices are more likely than not to firm and
move higher over the short to medium term.
My individual market view is detailed in the table at the
beginning of the newsletter. I am maintaining my Nat Gas view at
neutral but keeping my bias at cautiously bullish as prices are
once again above the technical support level of $4.30/mmbtu.
I am maintaining my oil bias at cautiously bullish as the
market is still focused on the geopolitics of North Africa and
the Middle East. I am leaving my view at neutral for the moment
as I think we could see a bit of easing in oil prices in the
short term but we are once again in the mode of buying the dips
as a strategy that will likely have the highest probability of
success.
Currently asset classes were mostly higher last week but ended
the week mixed as shown in the EMI Price Board table below.
Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com