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Nat Gas prices closer to testing lower end of trading range

Nothing has changed in my view... the spot Nat Gas contract has a higher probability of testing the lower end ($3.20/mmbtu) of the trading range before making any major move to the upside. The weather is now currently in a pretty decent warm-up along the high demand east coast and the latest NOAA six to ten day and eight to fourteen day forecasts are certainly not overly bullish or suggestive that there is going to be a major increase in heating related Nat Gas demand during the second half of February. If the rest of the heating season does not get hit with a late season cold spell not only will the spot futures contract breach the lower end of the trading range but the probability of it testing the psychological $3/mmbtu level will increase quickly.

About the only slightly bullish short term fundamental for Nat Gas is the above normal level of nuclear capacity that is currently shut-in for maintenance. There is 13,100 MW out versus 9,200 last year and 8,100 compared to the five year average., As I mentioned in yesterday's newsletter this is only a small positive for Nat Gas demand and will not likely have a significant impact on the upcoming withdrawal levels from inventory.

The EIA just released it latest monthly Short Term Energy Outlook report. To add a bit more bearishness to the mix they are projecting 2013 Nat Gas production to increase by 0.8 BCFPD versus 2012 or 1.1% to 70.02 BCFPD. Interestingly this is after a significant decline in drilling rigs dedicated to the Nat Gas sector throughout 2012. Following are the major Nat Gas related comments from the report.

EIA expects that natural gas consumption will average 70.3 billion cubic feet per day (Bcf/d) in 2013 and 70.0 Bcf/d in 2014. This month's prediction is a significant upward revision from last month's expectation of 69.7 Bcf/d and 69.4 Bcf/d in 2013 and 2014, respectively. The upward revision is mostly the result of changes to historical industrial sector consumption data, which were revised upwards in the recent release of the EIA Natural Gas Annual.

Forecasts for closer-to-average winter temperatures in 2013 and 2014 (compared with the record-warm temperatures in 2012) lead to increases in natural gas used for residential and commercial space heating. Despite Punxsutawney Phil's recent forecast of an early spring this year, a 15-percent increase in U.S. population-weighted heating degree days from 2012 to 2013 is still projected.

The projected increase in natural gas prices contributes to a decline in natural gas used for electric power generation from 25.0 Bcf/d in 2012 to 23.1 Bcf/d in 2013 and 22.6 Bcf/d in 2014. Consumption over the forecast period is less than the record-high 2012 levels, but remains high by historical standards and reflects an ongoing structural shift toward using more natural gas for power generation.

EIA's most recent monthly production data indicated that total U.S. average daily marketed production reached 70.4 Bcf/d in November 2012, 0.4 Bcf/d above the previous month, with upticks in the federal Gulf of Mexico, Oklahoma, Wyoming, and the category for other states, which includes Pennsylvania. Production in the Marcellus Shale areas of Pennsylvania and West Virginia is expected to continue rising, as recently drilled wells become operational. Despite relatively low natural gas prices, Pennsylvania drilling continues at a strong pace as producers target combination oil-and-gas wells. Projected marketed production increases from 69.2 Bcf/d in 2012 to 70.0 Bcf/d in 2013, and remains flat in 2014. Natural gas pipeline imports, which have declined over the last 5 years, are projected to remain near their 2012 level over the forecast. LNG imports are expected to remain at minimal levels of less than 0.5 Bcf/d in both 2013 and 2014. LNG imports mainly arrive at the Elba Island terminal in Georgia and the Everett terminal in New England, either to fulfill long-term contract obligations or to take advantage of temporarily high local prices due to cold snaps and disruptions. Higher prices for LNG elsewhere in the world have made the United States a market of last resort for LNG suppliers. Natural gas exports to Mexico have grown substantially since 2010, and EIA expects pipeline exports to continue increasing through 2014.

As of February 1, 2013, working gas stocks totaled 2,684 Bcf, which is 226 Bcf less than at the same time in 2012, but 351 Bcf greater than the previous five-year (2008-12) average, according to EIA's Weekly Natural Gas Storage Report. While warmer-than-average temperatures in December limited withdrawals, cold temperatures in January 2013 led to several big storage draw downs. EIA expects an end-of-March level of just under 2,000 Bcf, which is less than the unusually high 2,477 Bcf at the end of March 2012, but still more than the five-year average of 1,726 Bcf.

This week the EIA will release its inventory on its normal schedule and time... Thursday February 14th at 10:30 AM. This week I am projecting an average withdrawal of 170 BCF from inventory. My projection for this week is shown in the following table and is based on a week that experienced an above normal level of Nat Gas heating related demand. My projection compares to last year's net withdrawal of 113 BCF (a warm period) and the normal five year net withdrawal for the same week of 154 BCF. Bottom line the inventory deficit will widen modestly this week versus last year while the surplus versus to the five year average will narrow 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 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 284 BCF. The surplus versus the five year average for the same week will come in around 335 BCF. This will be a neutral to bullish weekly fundamental snapshot if the actual data is in line with my projection. The industry projections are coming in a range of 125 BCF to about a 180 BCF net withdrawal with the Reuters consensus currently around a net withdrawal of about 175 BCF.

On the global economic finance ministers and central bank governors from the Group of Seven industrial nations issued a joint statement Tuesday pledging that members won't target exchange rates. The G-7 said it reaffirmed a "longstanding commitment to market-determined exchange rates and to consult closely in regard to actions in foreign-exchange markets." The G-7 said members agree "that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability". They said members would continue to "consult closely" on exchange markets and cooperate "as appropriate." The G-7 consists of the U.S., Japan, Germany, the U.K., France, Italy and Canada. As I discussed in yesterday's newsletter there has been growing concern in the market over underperforming nations possibly using their currency to bolster their export business. At least for the moment the joint statement should calm those fears.

I am downgrading my Nat Gas view and bias to cautiously bearish as the weather forecasts and nearby temperatures remain bearish. 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 still in the heart of the winter heating season and currently those forecasts have turned a tad more 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 are mixed as shown in the following table.

Best regards,

Dominick A. Chirichella

Follow my intraday comments on Twitter @dacenergy

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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