“It’s when things get rough and you don’t quit that success comes.” -- Source Unknown
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EMI QuickView Short Term Market Overview | |||
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Impact on Energy Prices | |||
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Price Drivers |
Nat Gas |
Crude | |
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Supply |
CBr |
Cbr | |
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Demand |
N |
N | |
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Inventories |
CBr |
Cbr | |
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Cooling/Heating Weather |
CBu |
N | |
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Tropical Weather |
N |
N | |
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Global Equities |
CBu |
CBu | |
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Geopolitics |
CBu |
CBu | |
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Technicals |
N |
N | |
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Market Sentiment |
N |
N | |
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Overall View |
N |
N | |
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Bias |
N |
N | |
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N - Neutral Bu - Bullish Br- Bearish | |||
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CBr - Cautiously Bearish CBu - Cautiously Bullish |
Nothing like a weekly inventory report that the market quickly embraced after several days of the market languishing. Today’s bullishly viewed EIA inventory report (more details below) ahead of the onset of much warmer than normal weather engulfing a major portion of the US was enough to send a large number of the weak shorts to the sidelines and entice a few bottom pickers into the fold. Prior to the release of the inventory data the market was within $0.008/mmbtu of the intermediate technical support level as shown in the following chart. Immediately after the data release prices quickly reversed and actually breached the downward channel within the broader trading range and for the moment dodged a technical bullet as the intermediate support level held for now. In fact from a technical perspective it is now looking more and more like prices have a higher probability of moving higher and testing the Ichimoku cloud formation shown on the chart and sitting above the current price between $4.65 to $4.823/mmbtu range over the next week or so. I view the lower end of the cloud formation as the next major level of technical resistance.
Recall late last week I suggested selling out of the money puts around the $4/mmbtu level with an expiration of July 27th. That trade was my conservative approach to bottom picking and so far the trade is doing well having lost about half of its value since last week( this was a short trade that we are looking for it to lose all of its value prior by expiration). With only seven trading sessions left to July options expiration day I still like holding onto these short put positions. With today’s push in prices along with the onset of hotter than normal weather the probability of prices testing higher levels is much higher than prices collapsing anytime soon.
Today’s EIA inventory report was positive on several fronts but based on the market reaction it was viewed as a short term game changer. The results from today’s report are summarized in the following table. The table compares today’s results with last year and the five year average for the same week. Today’s net injection into inventory was the same as last week’s number and within the consensus forecasts (although marginally higher than my 75 BCF projection). Compared to last year the only region of the country that is still showing an overhang is the Consuming West region as a result of the much milder than normal weather that has been lingering on the West Coast this summer (so far). Both the Consuming East and Producing regions...which tend to be impacted the most during the winter heating season are both running a deficit versus last year. Total stocks are now 33 BCF or 1.1% below last year.
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Daily Hedger Nat Gas in Working Storage for Week Ending 7/9/10 | |||||||
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Billions of Cubic Feet (BCF) | |||||||
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Current |
Last WK |
Last Yr |
Five Year |
Diff. Vs. |
Diff vs. |
Diff vs. | |
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07/09/10 |
07/02/10 |
07/10/09 |
Average |
Last Wk |
Last Yr |
Last Yr | |
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Regions | |||||||
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East Consuming |
1384 |
1341 |
1402 |
1337 |
43 |
(18) |
47 |
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West Consuming |
470 |
459 |
442 |
377 |
11 |
28 |
93 |
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Producing |
986 |
962 |
1029 |
852 |
24 |
(43) |
134 |
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Total US (Lower 48) |
2840 |
2762 |
2873 |
2566 |
78 |
(33) |
274 |
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Data Source EIA |
Compared to the five year average for the same week the main winter heating region...Consuming East is currently at about the same level as the five year average (only 7 BCF or 3.5% higher). However, total stocks are still 274 BCF or 10.7% above the five year average for the same week. Although the inventory situation is improving (improvement defined as the surplus narrowing) compared to the five year average supplies remain plentiful.
The main reason why the market has embraced today’s inventory number with a fair amount of enthusiasm (enthusiasm defined as an almost 7% upward price move) is the result of the overhang narrowing for the ninth week in a row versus last year and the fourth week in a row versus the five year average for the same week. This is shown in the following chart of the differential between current inventories and last year and the five year average. As we entered the tail end of the peak winter heating season the overhang surged versus last year and the five year average. However the surplus peaked in early Spring or actually during the shoulder season and the dissipating of the surplus has continued pretty much since peaking. Although the surplus versus the five year average still has a long way to go to even get to a more historical relationship the overhang versus last year has declined almost back to where it was during the peak winter heating season in the second half of February.
The current inventory pattern is encouraging for the bullish investor/ traders and a bit concerning for the bears (which is why we saw a quick exit by some of the weaker shorts in the market). This pattern could get a further boost from the upcoming heat wave as well as any slowing in rig counts. If you recall in Friday’s newsletter it looked like we might be seeing the beginning of Nat Gas rig counts beginning to peak and possibly move to lower levels as a result of the low price environment for Nat Gas. A few weeks does not automatically mean we are in a sustainable new pattern for inventories but what we have seen over the last month or so is starting to suggest that the overhang may be heading in the right direction...at least as far as the bulls are concerned.
With Nat Gas prices possibly poised for a recovery over the next month or so it changes the landscape a bit insofar as the power plant facilities that can switch from coal to Nat Gas. Coal prices have been rising strongly this year and are already higher by about 30% in 2010 while Nat Gas prices have declined by almost 18% this year. However, if Nat Gas does in fact recover from current levels the economics of switching from coal to Nat Gas will get even more uninteresting. About 10% of the power plants in the US ( mostly in the Southeast) have the ability to switch fuels. With another round of hot weather evolving at the moment both of these fuels are going to be impacted from a consumption and price viewpoint. Coal still holds a significant margin (spark spread) advantage over Nat Gas to generate electricity and unless we see a collapse in Nat Gas prices and/or another surge in coal prices as a result of the heat wave the fuel of choice is likely to remain coal for the next several months. In fact with the potential exposure from the currently forgotten hurricane season Nat Gas prices can easily go through the roof if any hurricane hits the Nat Gas rich portion of the US Gulf Coast. Do not lose sight of the fact that although there are no hurricanes in the forecast for the next several days we are still in the early part of the season and not yet even in the peak hurricane part of this long season.
Right now the fundamentals (as measured by the evolving inventory situation), the technicals (holding support) and the onset of hotter than normal weather with the hurricane season only in the early stages all suggest that Nat Gas prices have a higher probability of moving higher and moving even further away from being economical to displace coal.
Today’s price action was a bit overdone and in my view was mostly a result of short covering rather than a result of new buyers coming into market. Absent any new market moving news or weather related activity I believe futures will give back some of today’s gains over the next trading session or two. My individual market views are detailed in the table a the beginning of the report. I have moved back into the neutral corner for my bias as the technicals did not break down and today’s inventory report was positive. Although I think that Nat Gas prices are likely to work higher over the next week or so I am not changing my bias from neutral until I see a bit more conformation of the both the technicals and the weather pattern.
Currently Nat Gas ended the session up almost 7% while crude and equities remained under pressure throughout all of Thursday’s trading session.
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Current Expected Trading Range |
Expected Trading Range | |||
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7/15/10 |
Change |
Low |
High End | |
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From |
End Support |
Resistance | ||
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2:59 PM |
Yesterday | |||
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Aug NYM NG |
$4.600 |
$0.294 |
$4.000 |
$5.000 |
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Sep NYM NG |
$4.602 |
$0.283 |
$4.000 |
$5.000 |
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Aug ICE UK NG |
$46.76 |
($0.16) |
$45.00 |
$53.00 |
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Aug WTI |
$76.61 |
($0.43) |
$70.00 |
$77.50 |
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Dow Futures |
10,253 |
(53) |
9,800 |
10,500 |
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US Dollar Index |
82.75 |
(0.848) |
80.000 |
85.300 |
Best regards,
Dominick A. Chirichella
Energy Market Analysis is published daily by the Energy Management Institute 1324 Lexington Avenue, # 322, New York, NY 10128. Copyright 2008. Reproduction without permission is strictly prohibited. Subscriptions: $129 for annual orders. Editor in Chief: Dominick Chirichella, Publisher: Stephen Gloyd, Editor Sal Umek.
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